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The FRC puts the UK Corporate Governance Code on a diet

The Financial Reporting Council has published for consultation its review of the UK Corporate Governance Code.  This follows a fundamental review, with the proposed revised Code being a slim shadow of its former self (13 pages instead of 32).  The FRC describes the result as “shortened and sharpened” but the outcome isn’t radical, with the concepts of the unitary board and the “comply or explain” approach being retained.  The revised Code builds on the Government’s conclusions announced in August following its consultation on Corporate Governance Reform but also on a variety of other sources including the BEIS select committee report from earlier this year and the FRC’s own 2016 report on corporate culture.  There may also be a hint of influence from the Investment Association’s agenda in there as well.  Since this is a remuneration and benefits blog, we’ll concentrate on those aspects of the new Code in this post. 

Unsurprisingly, the FRC has included everything that the Government asked it to (we’ve included the references in case readers want to find the relevant bits in the revised Code):

  • Giving the workforce a voice in the boardroom (Provision 3).  Here the FRC has stuck rigidly to the Government’s three potential solutions: (i) appointment of an employee director; (ii) a formal workforce advisory panel; or (iii) a designated non-executive director.  The last of these is the easiest option for most companies but they may well need to significantly increase the fees of directors taking on such a role if it is to be a remotely tempting proposition.

  • Adding detail on how companies should respond to significant votes against shareholder resolutions (Provision 6).  The consultation document gives some interesting statistics on this, with a significant minority of companies failing to regard shareholder rebellions of over 20% of votes as “significant”.  That is addressed with the 20% figure being written into the revised Code, which sets this pretty much at the level which the majority of the market is comfortable with.  The requirements for the announcements on these votes and the requirement to report back in the following annual report are retained, with an interim statement within six months now added.  These are general requirements but clearly the changes will have particular influence on remuneration policy/implementation votes.

  • Increasing the total vesting/performance/holding period for share-based awards from 3 to 5 years (Provision 36).  Market practice is well ahead of the FRC on this one but this will still have an effect outside of the FTSE 350.

  • Widening the role of remuneration committees in ensuring executive pay is aligned with pay in the wider workforce.  The wording used in the revised Code Provision 33 is differently worded but states that the Remuneration Committee should oversee “remuneration and workforce policies” and take these into account in setting policy for executive remuneration.  However, the pressure to align executive pay with that of the wider workforce comes in through Provision 41, which sets out a number of new disclosure requirements for the Annual Report relating to the reasoning, etc behind executive remuneration policy.  The remuneration of Senior Management is also brought fully into the remit of the Remuneration Committee, which is probably as a result of the trend for fewer senior managers to hold full board directorships.  It will be interesting to see how this will influence areas of disclosure where some companies are currently perceived as hiding behind fairly generic wording in their remuneration reports.

  • New guidance on the formulation of share-based remuneration.  The revised Code takes a more general approach in the way that executive remuneration links in to long-term company performance and value creation, without limiting this specifically to share-based remuneration (Provision 40).  The emphasis is on clarity, simplicity, predictability, proportionality and cultural alignment.  This guidance is quite vague and it is possible that the Government was actually hoping for something with a bit more bite to it.

  • Requiring all new remuneration committee chairs to have at least 12 months experience on a remuneration committee (Provision 32).

There are also a few other interesting changes:

  • Remuneration schemes should allow board discretion to “override formulaic outcomes”.  Although this also affects annual bonuses, this change will mainly be felt in the way that it applies to long-term share-based schemes such as LTIPs.  The consultation document (at paragraph 84) makes it clear that this is intended to apply so that performance outcomes can be overridden where the outcome does not reflect either underlying company performance or performance of the individual director.  Shareholders will need to remember that this discretion cuts both ways, although it will be a brave Remuneration Committee that uses this discretion to benefit executives without clear shareholder support.  Existing schemes will need to be reviewed to ensure that they match the new wording.

  • There is a new requirement that the pension consequences of changes to pensionable executive remuneration should be aligned to the pension arrangements for the workforce as a whole (Provision 38).  The disparity between executive and general workforce pension provision has long been controversial and it will be interesting to see if the FRC sheds any light on exactly what effect this vaguely-worded change is intended to have.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume VII, Number 341


About this Author

Clifford Sims, Squire Patton Boggs, Pension Fund Investment Lawyer, UK

Clifford is a partner in our London office and heads our Pension Fund Investment Group. He is recognised by Chambers UK as a leading individual for pensions and “an expert in investment and financial services in relation to occupational pensions” who is "extremely well organised, very commercial" and “is someone who is able to combine good technical knowledge with communications skills”.

The Legal 500 UK commented he is “more commercial than the average pensions lawyer” and “deeply knowledgeable”. He advises trustees, local authorities, product...

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Caroline Noblet, Squire patton Boggs, employment matter lawyer, multijurisdictional litigation attorney, London

Caroline Noblet co-leads our Labor & Employment Practice Group and is based in our London office. Caroline has approximately 25 years of experience as an employment lawyer, advising a broad range of businesses including FTSE 100 and 250 companies. She is responsible for some of the firm’s key global accounts, as she co-ordinates and advises in relation to all matters of employment law, on multijurisdictional and local issues. She is passionate about the benefit a “one-stop” shop service can bring to clients, in terms of the effective and efficiency of legal services...

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