Summary and implications
Corporate governance is firmly on the agenda this autumn, with a renewed focus on gender diversity in the boardroom and a slew of recent statements and consultations on executive remuneration.
Key developments include:
- The FRC’s announcement that it will amend the UK Corporate Governance Code to strengthen the principle of boardroom diversity;
- The ABI’s revised Principles of Remuneration and its recent Report on Board Effectiveness;
- The Government’s linked consultations on Executive Remuneration and The Future of Narrative Reporting.
The FRC is calling on all companies voluntarily to adopt the new Code diversity provisions with immediate effect.
- Boardroom diversity
The FRC has announced that it will amend the UK Corporate Governance Code to require listed companies to report annually on:
- Boardroom diversity policy, including gender;
- Measurable objectives that the board has set for achieving the policy; and
- Progress made in achieving those objectives.
The FRC will also update the Code to include the diversity of the board, including gender, as one of the factors to be considered when evaluating its effectiveness.
The new provisions on diversity will apply to financial years beginning on or after 1 October 2012, giving the FRC time to consult on other possible changes to reflect current discussions on narrative reporting (see below) and effective company stewardship. However the FRC “strongly encourages all companies voluntarily to apply and report on the diversity additions to the Code with immediate effect”.
Raising the number of women directors – progress to date
The FRC’s announcement will be welcomed by diversity campaigners but is set against an arguably disappointing backdrop. A recent report on progress since Lord Davies’ review of women on boards finds signs of improvement, but not enough. Lord Davies has urged FTSE 350 chairmen to set out the percentage of women they aim to have on boards in 2013 and 2015. But only 33 companies in the FTSE 100 have set targets for raising the number of female directors, and of those 33, only 10 set themselves targets of greater than 10 per cent increases. Only 17 of FTSE 250 companies have announced board targets so far.
- Executive remuneration
Against a backdrop of mounting pressure to tackle escalating executive pay levels, the ABI has reissued its influential guidance on executive remuneration. The Department for Business, Innovation and Skills (BIS) has also published two linked consultations on executive remuneration and narrative reporting.
ABI’s Principles of Remuneration
On 29 September 2011, the ABI launched an updated version of its guidance on executive remuneration, the “ABI Principles of Remuneration”. Whilst not dramatically rewritten, the guidance does have a clearer focus than previously on the need to avoid excessive or undeserved remuneration. In its covering press release, the ABI indicates that the revised Principles address investors’ renewed concerns on executive pay. The key Principles indicate that company boards should:
- Support appropriate reward for exceptional performance;
- Strongly resist any payments for failure;
- Understand that excessive or undeserved remuneration undermines the efficient operation of the company, adversely affects its reputation and is not aligned with shareholder interests; and
- Not engage in crude benchmarking when seeking to justify increases.
The ABI has also published its “Report on Board Effectiveness: highlighting best practice: encouraging progress”, drawing together recommendations for maximising the performance of company boards. It focuses on three key areas: diversity, succession planning strategies and board evaluation, and includes many examples of best practice. The ABI’s report sits alongside the FRC Guidance on Board Effectiveness, published in March 2011, which is guidance designed to help companies apply the principles of the UK Corporate Governance Code.
BIS consultations on narrative reporting and directors’ pay
The consultations, Executive Remuneration: discussion paper and The Future of Narrative Reporting: Consulting on a new reporting framework, close on 25 November 2011, with resulting changes to be implemented for financial years beginning on or after 1 October 2012.
The most controversial suggestion on executive remuneration is for shareholders to have a binding vote on the remuneration report (or, alternatively, on the total level of reward for the board as a whole). At present, the shareholder vote has only advisory status. There are several other proposals for greater shareholder involvement, as well as proposals on the role and make-up of the remuneration committee and on the structuring of remuneration packages.
The narrative reporting consultation principally focuses on a new structure for narrative reporting and clearer reporting of executive remuneration. A key proposal is that quoted companies should be required to publish a single table showing the total remuneration awarded to each individual director in the financial year in question, including a cumulative total. Some commentators have suggested that if this proposal is implemented, allowing investors to see at a glance each director’s total pay package, this could have a profound impact on their ability and readiness to engage with companies on the issue of executive pay.
Companies’ Remuneration Policies Bill
Lord Gavron has presented a Private Members’ Bill on executive remuneration which has had its first reading in the House of Lords. The Bill, if passed, would require shareholder ratification of the remuneration committee’s decisions on remuneration of the company’s directors and its five most highly paid employees. It would also require them to be voted on by a secret ballot of the company’s employees. As a Private Members’ Bill, it is unlikely to become law, but it is a strong indication of continued parliamentary concern about executive pay.