Corporate finance image

FRC consultation on directors’ remuneration

Article

Posted by , on

Summary: Hot off the heels of the executive remuneration regulations (the regulations) which came into force on 1 October 2013, the FRC has published a consultation paper on three possible changes to the UK Corporate Governance Code (the Code).

The changes within the consultation paper concern:

  • clawback arrangements;
  • whether non-executive directors (NEDs) who are also executive directors in other companies should sit on the remuneration committee; and
  • what a company should do if there is a “substantial” vote against the remuneration resolutions.

The FRC has not resolved to change the Code and welcomes views on these proposals. If changes are proposed, arising from this consultation, these will be consulted on in Q1 2014 and will apply for accounting periods beginning on or after 1 October 2014. Comments must be received by 6 December 2013.

Clawback arrangements

Under the Code, companies are required to consider the use of provisions which would allow them to reclaim variable components of remuneration in exceptional circumstances of misstatement or misconduct. The regulations require quoted companies to disclose (i) provisions for the recovery of sums paid or the withholding of payment and (ii) the details of sums recovered/withheld and the reasons for doing so.

Question: Should the Code be changed to track the wording in the regulations or to specify the circumstances under which payments could be recovered and/or withheld?

Remuneration committee membership

The Secretary of State believes there is a “perceived conflict” in allowing serving executives to sit on the remuneration committees of other companies.  In 2012, 46% of FTSE 350 companies had remuneration committees which included one or more individuals who were also executive directors of other companies in the FTSE All Share Index (ENED(s)).  However, noting the level of shareholder dissent against remuneration reports in 2012, there is only a fraction of a difference between those FTSE 350 companies which did have NEDs also sitting as executives on other boards and those which did not:

FTSE 350 companies and NEDs

Source: Manifest – The Proxy Voting Agency

Question:  Are changes to the Code required to deter this practice?

Votes against the remuneration policy and/or annual remuneration report

Under the regulations, where there is a “significant” percentage of votes against (which the GC100 guidance suggests as being where votes against are in excess of 20%) the resolution to approve the directors’ remuneration policy and/or the annual remuneration report, the latter must contain a summary of the reasons for such vote(s), as far as are known to the directors, and any actions taken in response. The Code does not currently state how boards should respond if they fail to obtain a substantial majority in support of such a resolution.

Question:  Is there a need for an explicit requirement in the Code (in addition to those in the regulations) and, if so, should there be criteria for determining what constitutes “significant”?

Conclusion

It is interesting to see that the FRC has not at this stage recommended that the Code be amended. This suggests that, unless there is overwhelming support for the changes during the consultation process, the Code will remain unaltered.

You should read this if you are a company which complies or explains against the UK Corporate Governance Code.

Stay informed

Sign up to receive email alerts from our award winning Expert Insights team

Sign up now

See more insights by category

This site uses cookies to help us improve our services and your browsing experience. For further information about cookies, including about how to change your browser settings to no longer accept cookies, please view our privacy policy.