Directors' remuneration reporting and shareholder approval
The new regime for directors' remuneration reports of quoted companies came into force on 1 October and applies for financial years beginning on or after 1 October 2013. For these purposes "quoted companies" means those listed on the main market in London (but not AIM), officially listed in an EEA State or admitted to dealing on the NYSE or Nasdaq.
The changes were brought about by sections 79 to 82 of the Enterprise and Regulatory Reform Act 2013 and by the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (SI2013/1981) (the Remuneration Regulations) both of which came into force on 1 October.
The remuneration report must now include two separate sections – the remuneration policy and the implementation report.
The remuneration policy must set out the company's approach to every element of directors' remuneration, including recruitment and loss of office payments. Shareholders will have a binding vote on the resolution to approve the remuneration policy and companies will have to seek shareholder approval at least every three years, or more frequently if a company wishes to change the policy.
The implementation report must set out how the remuneration policy has been implemented in the relevant financial year and must include a single figure for the total pay received by a director in that year. Shareholders have an annual advisory vote on a resolution to approve the implementation report. If, however, the implementation report is not approved in a year when the remuneration policy has not been put to a binding vote, a binding vote on the remuneration policy is triggered in the next financial year.
GC 100 Guidance
In September, the GC 100 and Investor Group published guidance on the disclosures which will be required under the new Remuneration Regulations. The guidance is designed to offer a practical approach to the implementation of the new requirements and to help promote engagement between companies and investors. Some points of interest from the guidance:
in some areas the guidance recommends disclosures which go beyond what is required to meet the legislative requirements because it is felt these will enhance engagement between companies and investors and help make voting decisions better informed
once a remuneration policy is approved it cannot be changed without being put to a binding vote again, so it is suggested that '"emergency discretion" wording is included in the remuneration policy to cover exceptional and unforeseen circumstances
the guidance states that remuneration policy should drafted so that it should only require a shareholder vote every three years, as required by legislation, rather than annually
the issue of commercial sensitivity is discussed in relation to disclosure of performance measures and targets
the issue of when the first remuneration policy should take effect, given the element of flexibility in the Remuneration Regulations is discussed.
The guidance will be reviewed and refreshed as market practice develops. The guidance can be found here.
Financial Reporting Council consultation on changes to the UK Corporate Governance Code (Code)
On 2 October the Financial Reporting Council (FRC) published a Consultation Document seeking views on whether, given the changes to the way directors' remuneration must now be reported and voted on, any changes are needed to the Code. Although the FRC has not decided that there should be, there has been a commitment from the FRC since June 2012 to consult on possible changes once the legislative proposals on directors' remuneration had been finalised and had come into force.
The FRC is consulting on three specific proposals:
whether the wording in the Code should be amplified to cover more specifically clawback arrangements
whether non-executive directors who are also executive directors of other companies should sit on the remuneration committee
what actions companies might take if they fail to obtain at least a substantial majority in support of a resolution on remuneration.
In addition the FRC is seeking views as to whether any changes are needed to ensure the Code is compatible with the Remuneration Regulations and whether the Code should continue to address the design of performance-related remuneration, the process by which remuneration should be set and disclosures relating to the activities of the remuneration committee.
The deadline for responding to the Consultation Document is 6 December. If any changes to the Code are proposed they will be subject to consultation in the first quarter of 2014. Any resulting Code changes will apply from 1 October 2014.
New structure for narrative reporting
As we have previously reported, (see our July newsletter article), we now have a new structure for narrative reporting which replaces the requirement for a business review, as part of the directors' report, with a requirement for a stand-alone strategic report. The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 (SI 2013/1970) which set out the detailed requirements for the new structure came into force on 1 October. Click here for the final regulations and here for the explanatory memorandum.
The FRC's Exposure Draft which sets out guidance on the application of the new strategic report requirements is out for consultation until 15 November. Please see our September article for details.