Revised committee terms of reference

Of general interest to those working in governance

We have recently published updated guidance notes on Terms of Reference for the Audit, Remuneration and Nomination committees to reflect changes to legislation and regulation, particularly with regard to reporting, developments in the UK Corporate Governance Code and changes to good practice.

Changes common to all revised ToRs

  • The revised guidance notes reflect the revised UK Corporate Governance Code of July 2018 and revised Guidance on Board Effectiveness 2018
  • All committee Terms of Reference include:
    • requirements for increased level of detail in reporting in the annual report
    • the increased emphasis on committee chairs’ engagement with shareholders on matters within the committee’s remit, and
    • the need for interaction between committees.

Audit committee

  • The Audit committee Terms of Reference also reflect the revised guidance for Audit Committees published in April 2016
  • Changes include:
    • Requirement for committee as a whole to have competence relevant to the sector in which the company operates
    • Requirement for a more detailed description of the work of the audit committee in the annual report, particularly around the auditor:
      • how the committee has assessed auditor independence
      • the approach taken to appointment/reappointment of auditor, information on length of tenure, when tender last conducted and advance notice of retendering plans
      • how auditor independence and objectivity is safeguarded if the audit firm provides non-audit services

Nomination committee

  • Changes include:
    • Increased focus on succession planning – for board but also senior management and the development of a diverse pipeline for succession
    • More focus on refreshing the board, taking into account the length of service of individual directors, the chair and the board as a whole
    • Reporting on:
      • the policy on diversity and inclusion
      • how board evaluation has been conducted
      • gender balance of senior management and their direct reports
      • identifying any external search consultancy that has been engaged and disclosing any other connections they have with the company or individual directors

Remuneration committee

There are more substantial changes to the remuneration committee Terms of Reference than to the others, including:

  • a requirement that the chair of the remuneration committee be someone who has served on a remuneration committee for at least 12 months
  • extending the remuneration committee’s remit to include remuneration of senior management, including the company secretary
  • establishing remuneration schemes that:
    • promote long-term shareholding by executive directors that support alignment with long-term shareholder interests
    • make share awards subject to five years holding and vesting and a formal post-employment policy
    • support strategy and promote long-term sustainable success, with executive remuneration aligned to company purpose and values, linked to delivery of long-term strategy
    • include the use of discretion to override formulaic outcomes and recover/withhold sums or share awards under appropriate specified circumstances
    • reflect the Code requirements for clarity, simplicity, risk mitigation, predictability, proportionality and alignment to culture
  • a requirement that the remuneration committee review workforce remuneration and related policies

Reporting:

  • reflects the Code requirements for more detailed reporting on the remuneration committee’s work in the annual report, and disclosures required by The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (substantially more information so not set out in detail in the Terms of Reference)
  • the requirement to identify the remuneration consultants (if any) in the annual report and disclose any connection with the company or any individual director

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