The Financial Reporting Council launched a consultation in December 2017 on a comprehensive shake-up of the UK Corporate Governance Code.
Our detailed Insight summarising the proposed changes in the new Code is here. From a remuneration perspective, the proposed changes largely reflect the recommendations set out in the government’s response to last year’s Green Paper and include the following:
- Extension of LTIP vesting periods: A new Provision has been included extending the vesting and holding period for shares granted or other forms of long-term incentives, in normal periods, from at least three years to at least five years.
- Mandatory formula override: A new Provision has been included requiring that remuneration schemes and policies should provide boards with discretion to override formulaic outcomes.
- Expanded role of remuneration committee in workforce pay: The revised Code includes a Provision that remuneration committees should take responsibility for oversight of company remuneration and workforce policies and practices. Remuneration committees should demonstrate how company policies and practices incorporate Code recommendations, including a requirement for companies to explain what workforce engagement has taken place, and how executive remuneration aligns with wider company pay policy.
Other proposed changes relevant to executive pay include the following:
- Workforce representation: A specific mechanism to enhance the voice of the workforce – a key recommendation of the response to the Green Paper – was for companies to adopt, on a comply or explain basis, an employee consultation mechanism. All three government proposals have been reflected in the revised Code, to give companies the flexibility to choose the mechanism most suitable for them. These are:
- a director appointed from the workforce;
- a formal workforce advisory panel; or
- a designated non-executive director.
The FRC’s use of the term “workforce” (rather than “employees” as used in the Green Paper) is intended to capture developments in the gig economy, and includes contractors and agency workers.
- Addressing adverse shareholder votes: New Provisions require that where more than 20% of votes have been cast against a resolution:
- the company should explain, when announcing voting results, the actions it intends to take to consult shareholders in order to understand the reasons behind the result;
- the company should publish an update no later than six months after the vote; and
- a final summary should be provided in the annual report, or in the explanatory notes to resolutions at the next meeting, on the impact the feedback has had on the decisions of the board and any actions or resolutions now proposed as a result.
Whilst the Green Paper focused on shareholder votes against director remuneration resolutions, the Code proposals (and the related public register maintained by the Investment Association – see further below) relate to votes against any resolution proposed at a general meeting.
Following the consultation, which closes on 28 February 2018, the FRC intends to publish a new Code in mid-2018, with the revised code applying to financial years commencing on or after 1 January 2019.