20 December 2018 by Ben Harber and Kathy-Ann Pearce
Part two of our guide to corporate governance reforms and forthcoming annual reporting obligations
In this second part of our guide to corporate governance reforms and forthcoming annual reporting obligation we will look at the other aspect of the reforms under the Companies (Miscellaneous Reporting) Regulations 2018 (the Regulations) and the revised UK Corporate Governance Code (the Code).
This article will focus on the changes to remuneration reporting within the director’s and remuneration committee reports, together with the nomination committee and the revised AGM reporting requirements.
Under the provisions of both the Regulations and Code, as previously stated, these reforms will take effect from accounting periods on or after 1 January 2019, with first reporting due in 2020. There are however, a few exceptions highlighted below.
The Regulations set out additional information needed for disclosure in this report with respect to executive pay or pay ratios.
It provides that UK companies (quoted and UK registered) with more than 250 UK employees publish and explain their pay ratio for a CEO’s total remuneration (a Single Total Figure of Remuneration) to the median, 25th and 75th percentile full-time equivalent remuneration of their UK employees (taking into account wages, taxable benefits, annual bonuses and other incentive plans).
The information must then be published in a prescribed form, accompanied by specific information in support, explaining whether and why the company believes the ratio is consistent with the wider policies on employee pay, reward and progression. Further guidance can be found in the Government’s Q&A.
In addition, UK quoted companies are required to disclose directors’ remuneration, and the effect of potential future share price increases on executive pay outcomes for periods of more than one financial year, assuming a share price growth of 50% over that period. This will have to be stated in the next ‘new’ remuneration policy.
In practical terms, companies will need to determine what necessary steps should be taken in order to meet with these requirements. There is a significant amount of data to be analysed and disclosed in a prescribed form, therefore, ensuring that the data capture processes are aligned with this format would ensure the relevant information is correctly reported.
The provisions on remuneration will be exempt from the 2020 reporting period requirement and will apply to all new or changes to existing remuneration policies made in 2019.
The revised Code extends the remit of the remuneration committee and provides that the committee be required to review the remuneration of the workforce together with any related policies as well as setting pay for all senior management below board level.
This places a bigger responsibility on the committee in respect of the company’s operations as they will be responsible for setting director’s pension arrangements in line with those of the workforce.
“Boards will also be required to conduct board evaluations, with the results disclosed in the annual report”
The committee must also ensure that director’s termination payments do not reward poor performance and that compensation is reflective of the director’s obligation to mitigate loss.
The committee will be required to provide detailed content around termination payments within the annual report. As a result, the chair of the committee will be required to have at least one-year’s prior remuneration committee experience.
The onus will therefore be on remuneration committees to ensure the relevant skills and experience exists amongst members to ensure the proper procedures are in place to meet these new requirements. Close interaction with the nomination committee would be recommended to ensure that a better understanding of the relevant skills required.
The revised Code has now put into principle the need for succession planning, appointment on merit, objective criteria and board diversity.
As a result, changes to the practices and reporting obligations of the nomination committee will be required with regard to succession planning, its strategy in relation to supporting a diverse board pipeline and its approach to ensuring a gender balance for senior management and direct reports.
Boards will also be required to conduct board evaluations, with the results disclosed in the annual report.
As a result, company secretaries should be advising on the relevant amendments required to the terms of reference (TOR) in respect of the remuneration and nomination committees.This entire process if not already in place will require careful planning as boards will not only have to access their current membership, but also look towards how they will be able to meet the new requirements to meet the reporting time-frame.
Company secretaries should therefore advise their boards that an overall review of the constitution of its committees would be a useful starting point in order to ensure that it has a good base point for compliance.
Finally, companies will have an automatic disclosure obligation upon receipt of 20% or more of votes cast against a board recommended resolution.
Such obligation is met by (1) an initial announcement to the market explaining the voting results and the intended actions for consulting with shareholders to understand their reasons behind their vote; (2) an interim publication (within six months of the vote) giving an update on shareholder views received (if any); and (3) providing a summary of the shareholder consultation in the next following annual report and, where applicable, the impact of any feedback would need to be included in the explanatory notes for the following year’s resolution.
It is important to note that this provision will apply to all AGM’s from 2019 onwards. Companies will need to ensure that it updates its policies and procedures on reporting on AGM results in order to trigger this new requirement should the twenty percent threshold be crossed.
The amount of work required to meet the new legislative reforms are quite considerable and will require boards to have properly considered and implemented such procedures.Additionally, the overall format of annual reports will need to be reviewed in order to accommodate many of these changes, so early planning is highly recommended.
We would recommend you refer to the useful guidance notes published by the FRC on Board Effectiveness and the Strategic Report (both published in July 2018).
Additionally, the recently published FRC annual review and guidance letter on corporate governance and reporting (2017/2018) will be a useful source of information for key areas for improvement in reporting for listed companies.
The prudent director and company secretary, would be minded to become familiar with all of these changes to reporting requirements to be prepared to address them in good time.