CEOs of listed firms face pay rules overhaul

18 September 2014 -

New requirements on bosses’ salaries among a host of planned changes to FRC’s Corporate Governance Code

Jermaine Haughton

Leaders of British listed companies could see closer regulation of their pay packages, it emerged yesterday. In an updated version of its UK Corporate Governance Code, the Financial reporting Council (FRC) has asked for companies to explain more clearly to shareholders how senior executives’ remuneration falls in line with their firms’ future goals and projected successes.

The Code also advises companies to set up arrangements that will enable listed firms to recover or withhold variable pay when appropriate, and says they should consider appropriate vesting and holding periods for deferred remuneration.

With the redraft, FRC chiefs are aiming to improve the quality of information that investors receive about the long-term health and strategy of listed companies. In the latest incarnation, the Code includes proposals for boards to include a “viability statement” in their strategic reports to investors. This will provide an improved, broader assessment of long-term solvency and liquidity, and is likely to look into the future significantly longer than 12 months.

FRC CEO Stephen Haddrill says the changes to the Code reflect a “sea change” in thinking, regarding management of risk at blue-chip companies. “The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation.” He said. “The changes on going concern implement the reforms proposed by Lord Sharman, whose work has stimulated a sea change in thinking about the assessment and reporting of risk and business prospects.”

He added: “The changes also reflect and have benefitted from extensive consultation. Recognising the different circumstances for business, companies are allowed to choose the period over which they look forward. But we are clear this should be more than a year, and reflect the nature of the business. Crucially the directors should explain their reasoning to investors. If included in the Strategic Report, their statements will be subject to a safe harbour in accordance with companies’ legislation.”

The changes on remuneration, he stressed, “also focus companies on aligning reward with the sustained creation of value. The Code will continue to operate on the principle of ‘comply or explain’, which has served investors and the UK corporate sector well for more than 20 years.”

Functions of boards in UK listed firms have also been brought into the spotlight, with the FRC setting an expectation that they should steer culture and values by establishing a “tone from the top”. In other words, directors and others in the C-Suite should lead by example by encouraging good behaviours throughout the organisation.

According to the FRC, the introduction of more diverse boards – reflecting different genders, races and disabilities, as well as contrasting approaches and experience – is key to the effective management of any board, creating a dialogue that is both constructive and challenging.

Where investors are concerned, meanwhile, the FRC says that companies should explain when publishing general meeting results how they intend to engage with shareholders when a significant percentage of them have voted against any particular resolution.

The revised Code will apply to accounting periods beginning on or after 1 October 2014.

A cautious welcome for the revised Code has been signalled at the Institute of Directors (IoD) – but the organisation argues that asking companies to predict results more than a year down the line is unrealistic. IoD director of corporate governance Dr Roger Barker said: “We are supportive of a greater emphasis on ensuring that remuneration policies are designed with the long-term success of the company in mind. The Code is right to encourage companies to recover or withhold variable pay when appropriate to do so, and to carefully consider appropriate significant vesting and holding periods for deferred remuneration.”

He agreed that it is “appropriate for companies to explain, when publishing general meeting results, how they intend to engage with shareholders when a significant percentage of them have voted against any resolution. The IoD called for this addition to the Code following a string of shareholder rebellions this year, including at Sports Direct, Burberry and Standard Chartered.”

However, he added: “Where we continue to have concerns relates to the need for companies to publish a ‘viability statement’ in their strategic report which will look ahead ‘significantly longer than 12 months’. The future is inherently uncertain and companies do not have crystal balls. Although investors would like companies to provide them with certainty about their future prospects, this is often not realistic.”

Check out our previous coverage of listed firms’ CEO pay.

For more on these issues, check out these details of a CMI theme paper on governance and reporting, to be presented at an IoD conference in October.