The final legislation containing the Government’s corporate governance reforms has been published. The Companies (Miscellaneous Reporting) Regulations 2018 will come into force on 1 January 2019.
The final regulations are identical to the draft on which we reported in our recent Corporate Law Update. Broadly speaking, the Regulations make the following changes from next year:
- Section 172(1) statement. Large companies will need to include a statement in their strategic report explaining how their directors have considered the factors set out in section 172(1) of the Companies Act 2006 when carrying out their duty to promote the company’s success.If the company is not a “quoted company”, it must also publish the statement on its website (or a group website). This will apply to non-traded companies and companies on AIM or NEX Growth.
- Corporate governance statement. Very large companies will need to include a statement in their directors’ report identifying a “corporate governance code” and explaining how they have applied or departed from the code (a so-called “comply or explain” obligation).This requirement will not apply to companies admitted to an EEA regulated market (such as the London Stock Exchange Main Market, the NEX Exchange Main Board or Cboe Equities Europe), which are already required to produce a corporate governance statement.In addition, although this new requirement applies only to very large companies, AIM companies of all sizes will continue to be required to comply or explain against a “recognised corporate governance code” under Rule 26 of the AIM Rules for Companies.In essence, this requirement applies principally to the largest private companies. The Financial Reporting Council has published a proposed code of corporate governance for very large private companies, which is intended to form a basis for complying with this new obligation.
- CEO pay ratio. Quoted companies will need to state the ratio of their CEO’s pay against average employee pay on the 25th, 50th and 75th percentiles using one of three methodologies. They will also need to explain any annual changes to the ratio and report on trends in the 50th percentile.The requirement will apply only to quoted companies with more than 250 employees. A quoted company is one whose securities are admitted to the Financial Conduct Authority’s Official List or admitted to dealing on the New York Stock Exchange or Nasdaq.
- Awards to directors. When reporting on awards to directors, quoted companies will need to state how much of each award is attributable to "share price appreciation", and whether any discretion to make the award resulted from share price appreciation or depreciation.They will also need to set out any executive director performance measures applicable across multiple years and the maximum amount receivable under them on a 50% increase in share price.
- Employee engagement. Companies with more than 250 employees (whether quoted or unquoted) will need to include more detail on how the directors have engaged with the company’s employees and had regard to their interests.
- Other stakeholders. Finally, large companies (again, whether quoted or unquoted) will need to explain how the directors have had regard to the need to foster business relationships with suppliers, customers and others during the financial year.