Proposed updates to UK Corporate Governance Code place emphasis on long-term remuneration for directors

Out-Law News | 28 Apr 2014 | 11:27 am | 2 min. read

UK listed companies would be expected to develop remuneration policies with more of a link between pay and the company ’ s long-term success, and should be able to recover or withhold variable pay if appropriate under proposed changes to the UK Corporate Governance Code.

The changes are included in the latest two-yearly update to the Code, which would take effect for financial years beginning on or after 1 October 2014. The Financial Reporting Council (FRC), which oversees the Code, is consulting on the proposed update until 27 June.

“The role of the board is to ensure the sustained success of their company and exercise responsible stewardship on behalf of their shareholders,” said the FRC’s chief executive, Stephen Haddrill.

“To do this effectively, they need to understand and manage the risks to the future health of the company. The remuneration of executives on the board must also incentivise them to put the company’s well-being before their own. These proposals, which reflect the views of investors and others on earlier consultations, are intended to encourage boards to focus on the longer-term, and increase their accountability to shareholders,” he said.

The UK Corporate Governance Code sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and shareholder relations. The Listing Rules, set by market regulator the Financial Conduct Authority (FCA), require all companies with a premium listing of equity shares on the London Stock Exchange to report on how they have complied with the Code in their annual report and accounts, and to explain where they have not applied it. There is no legal requirement for private companies to comply with the Code, but they are encouraged to do so.

The revised Code contains a number of provisions designed to strengthen the roles of remuneration committees, which would take on the lead responsibility for ensuring that company remuneration policies are “designed with the long-term success of the company in mind”. In addition, companies would have to consider appropriate vesting and holding periods for deferred remuneration, and to put in place ‘clawback’ arrangements that would enable them to recover or withhold variable pay when appropriate to do so.

More stringent risk assessment and management reporting would also be required by the updated Code, under which companies would be expected to “robustly” assess their principal risks and explain how they are being managed and mitigated. In addition, they would be expected to monitor their risk management and internal control systems and carry out regular reviews of their effectiveness, to be included in their annual reports. Companies would also be expected to state whether they believe that they will be able to continue in operation and meet their liabilities when taking these risks into account over a reportable period, which should be “significantly longer than 12 months”, according to the draft.

On annual reporting, when publishing the results of their annual general meetings (AGMs) companies would be expected to explain how they intend to engage with shareholders when a significant percentage of them have voted against any resolution. Companies would also be expected to state in their financial statements whether they consider it appropriate to adopt the ‘going concern’ basis of accounting, and identify any material uncertainties to their ability to continue to do so.