24 March 2021
The UK Government, through its Department for Business, Energy and Industrial Strategy, has launched a new consultation on a package of reforms aimed at improving the UK’s audit, corporate reporting and corporate governance systems.
Hidden in the 230 plus pages of proposals are suggestions to strengthen malus and clawback provisions for executive directors’ remuneration. These could lead to changes to the UK Corporate Governance Code and perhaps, in the long-term, the Listing Rules.
The Government’s proposed reforms come in response to a series of large corporate failures, widespread job losses and economic uncertainty dealt to the UK’s economy. This includes, in recent memory, the collapse of BHS, Carillion and Thomas Cook among others. Following these highly-publicised cases, the Government wants to boost stakeholder and wider public trust in corporate governance, directors’ reporting and accountability, audit and regulation.
The Big Picture
The Government is proposing steps to rebuild and restore trust in the UK’s economy and audit sector, as well as increasing the accountability of company directors in carrying out their statutory duties. The proposals include new reporting and disclosure requirements for directors, more stringent audit requirements and greater enforcement powers for the regulator. From a regulatory standpoint, the Government intends to replace the Financial Reporting Council (the FRC) with a new body - the Audit, Reporting and Governance Authority (ARGA). This new regulator will have fresh objectives and functions, as well as stronger powers to take enforcement action against company directors.
Malus and clawback
Of particular interest to our incentives industry are the proposals to strengthen malus and clawback provisions, including:
- a minimum list of triggers companies would be required to include for malus and clawback; and
- a minimum application period of two years “after an award is made”.
The suggested minimum triggers are:
- a material misstatement of results or an error in performance calculations;
- a material failure of risk management and internal controls;
- conduct leading to financial loss;
- reputational damage; and
- an unreasonable failure to protect the interests of employees and customers.
The Government’s initial approach in bringing these suggestions into effect is to consult on changes to the UK Corporate Governance Code. This would impact all companies with a premium listing in the UK. However, the Government has also outlined the potential to expand these changes to all listed companies, potentially through amending the Listing Rules. The full consultation and proposals can be found here. The deadline for responses to the consultation is 8 July 2021. The consultation welcomes views on the suggested malus and clawback triggers above.
The proposals, as a whole, aim to strengthen the UK’s corporate governance, reporting and audit frameworks to help safeguard the interests of investors and other stakeholders.
Whilst the introduction of a new regulatory authority is of interest, those working in the incentives industry will be paying closest attention to the malus and clawback proposals. Ever the hot topic, malus and clawback consistently hit the headlines when they fail to work! It is hardly surprising to see the Government’s continued interest in the effectiveness and enforcement of these provisions.
The suggested list of malus and clawback triggers closely aligns with those conditions that many companies will already have in place. One notable omission is a specific “corporate failure” trigger, which is included as a suggested trigger in the FRC's current Guidance on Board Effectiveness. In the proposal, this has been replaced by more specific circumstances (failures of "risk management and internal controls"), as well as the final broadly drafted trigger covering an “unreasonable failure to protect the interests of employees and customers”.
Outside of the Financial Services sector, malus and clawback provisions are not yet mandatory in the UK, as the Corporate Governance Code operates on a “comply or explain” basis. That said, the vast majority of large listed companies do comply, and have some sort of malus and clawback provisions in place. With these proposals in the works, companies should continue to regularly revisit their triggers, their processes and their malus and clawback enforceability.
Breaking non-news: A quiet “Tax Day”!
We previously issued an alert on the UK’s 2021 Budget which, from a share plans perspective, was relatively quiet. In that update, we flagged the excitingly named “Tax Day” on 23rd March, where more changes were expected. Having taken an initial look through yesterday’s updates, there is nothing much of interest to report to those working in the incentives industry!
If you have any questions on any of the above, or need any help with your malus and clawback provisions, please do get in touch.