The end of the year traditionally marks the time for investor groups to publish voting guidance on executive director remuneration in quoted companies.
- The Association of British Insurers investment group (now part of the renamed Investment Association (IA), representing a much wider investor base than just insurers) published updated guidance in October (click here for a link to a relevant Law-Now (Remuneration Guidelines – 20 October 2014)) as did the National Association of Pension Funds (NAPF).
- This was followed in December by the GC100 and Investor Group (GC100) producing supplementary clarification and emphasis to its 2013 guidance on the company law changes then introduced. The 2013 changes required further information on director pay to be given to investors and a binding shareholder vote.
- In January, ISS published their UK proxy voting guidelines for 2015.
This Law-Now looks at the issues the GC100 has identified as being important in its recent briefing. While the IA and the other investor bodies normally produce an annual update, there may not be a further GC100 update for several years.
By way of background, the GC100 was tasked by Vince Cable to provide guidance on the new director pay disclosure and approval legislation as companies were adapting to the new rules in 2013 (click here for the relevant Law-Now (Listed Company Director Remuneration – Final Draft Regulations Published – 12 June 2013)). The GC100 said then that it would produce an update to that guidance in 2014 reflecting on actual experience in the first year of operation of the legislation, which it has now done.
The GC100’s views are not binding and do not have the force of law. However, they do represent the opinions of the investor community tempered by companies’ own views – though investors’ views probably take priority - although, like all guidelines in this area they do tend to address the issues affecting larger companies and their shareholders rather than smaller companies, where limited resources and lower pay levels may mean that different views are taken.
The GC100 predictably says that companies should emphasise the link between strategy and remuneration in their report and should limit the capacity to use discretion to override what is stated as normal policy as far as possible. Clarity and directness of reporting is also, as always, encouraged. The GC100 also recommends that if the full policy is not included in subsequent annual reports, at least the policy table is included. Companies are not required to include their policy other than when they are putting it forward to shareholders and so in most cases this may not next be until 2017. Saving space may be a relevant factor not to include the full policy. However, where it is not included in the annual report, the policy should at least be separately stated on the company’s website and so this may be a new area for companies to construct.
Particular areas of concern
Three particular areas of remuneration are targeted:
- Concern is expressed that companies are too readily delaying disclosure of targets and outcomes for bonus and long-term incentive programmes. The commercial sensitivity override is described as overused.
- Many companies became comfortable as experience of dealing with the 2013 legislation emerged that there was no requirement to give a maximum for any element of remuneration where none had been set. The GC100 says that this was not the expectation of the legislation (which is probably true), although implicitly it recognises that this is what the legislation allows. However, it says that maximum levels should be given. If it is not already their practice, companies can probably get away with not doing this, however, until their new policies are voted upon. In many cases, this may not be until 2017.
- Finally, the FRC said last year that companies should report on a comply or explain basis on the withholding (also known as malus) and clawback arrangements companies have included. Both are needed. Relevant changes to the Corporate Governance Code have been made affecting reporting years beginning on or after 1 October 2014. However, the 2013 legislation does not require withholding or clawback and so some companies (particularly smaller ones) did not include these arrangements when drawing up their policy last year. It is a moot question as to whether a policy which was voted on by shareholders last year can be amended to bring in withholding and clawback arrangements now recommended by the new Corporate Governance Code without further shareholder approval. However, if changes to the policy to comply with the new Corporate Governance Code are needed, the GC100 guidance gives companies flexibility to introduce these when they are able to do so (although in our opinion in most cases companies will, if they wish, be able to bring in withholding and clawback arrangements as changes to the policy without needing shareholder approval).
The proposals for 2015
Overall, the IA and the GC100 welcome the improvement in disclosure and overall restraint that companies have shown with remuneration over the last year. Indeed it is surprising that the GC100’s first year report is not more critical - even the pressure for change in the three particular areas of remuneration highlighted above are not cast in particularly strong language. While individual incidents have caused tension and media focus, the general picture is one where conflict is falling.
However, as companies start to produce version two of their remuneration report under the new regime, remuneration reports can probably usefully take these general comments into account to reduce conflict still further, though how much investors as a group have the appetite to confront companies over the three identified issues still remains to be seen. A future Government may also change the legislation anyway to make it even harder for companies not to comply with underlying expectations on disclosure of targets/outcomes, maximum remuneration and malus/clawback.
Click here to see the Investment Association December 2014 remuneration update and current guidelines.
Click here to see the NPAF Corporate Governance Policy and Voting Guidelines 2014/15.
Click here to see the GC100 and Investor Group December 2014 Statement. This is reproduced with the permission of Practical Law Company Ltd (www.practicallaw.com).
Click here to see the ISS 2015 UK Proxy Voting Recommendations.