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Greater Transparency on UK Executive Remuneration and Shareholder Empowerment

Since the controversial announcement on 23 January 2012 by Vince Cable, the Business Secretary, that the UK Government intended to implement into law a new corporate governance regime to regulate executive remuneration, there has been much speculation and discussion as to the nature and extent of the proposed regime.  The Department for Business, Innovation and Skills (BIS) has consulted on this issue over the spring and subsequently issued on 23 May 2012 the Enterprise and Regulatory Reform Bill 2012-2013 (the Reform Bill).

At present, a quoted company is required to obtain shareholder approval of its directors’ remuneration report, and all shareholders are required to receive notice of the meeting to approve that report.  However, the law states currently that the remuneration package of any person employed by the company (including an executive director or a senior manager) cannot be conditional on shareholder approval (Section 439(5) of the Companies Act 2006).  One of the key proposals under the Reform Bill is the deletion of this statutory exclusion.

On 20 June 2012, the Government announced its proposals on directors’ remuneration.  The key proposals include

  • A binding vote on future remuneration policy (including the company’s approach to exit payments) at least every three years. 
  • Permitting a company to only make payments within the limits that have been approved by a majority of the shareholders.
  • An annual advisory vote on the implementation of the remuneration policy, including a vote on the actual sums paid.
  • A requirement to provide a single figure of remuneration for each director, which should include all types of reward received, including fixed and variable elements (for variable elements of pay, the figure will reflect actual pay earned, rather than potential pay awarded) and pension provisions.

Both the binding and the advisory votes will require an ordinary resolution of a company’s shareholders.  If the binding vote fails, a company must to continue using its existing policy until a revised policy is agreed.  If a company’s advisory vote fails, it will be required to propose a binding vote on its future remuneration policy at the next annual general meeting (AGM).

The New Reporting Regulations

In connection with these proposals, BIS launched a further consultation on 27 June 2012 in relation to a new set of remuneration reporting regulations (the New Reporting Regulations), the aim of which is to create a more robust framework within which directors’ pay is set.  The New Reporting Regulations will replace (rather than amend) the existing reporting regulations for quoted companies that are required to prepare a remuneration report, as set out in the Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.  The New Reporting Regulations will require a company’s remuneration report to be split in two parts.

The first is a policy report, that will set out all elements of a company’s remuneration policy—including exit payments—and detail key factors taken into account in setting that policy.  This part of the report will be subject to a binding vote.

The second is an implementation report that will set out details of how the policy has been implemented over the past financial year, including actual payments to directors (set out as a single figure), exit payments, and details on the link between company performance and pay. 

The Government believes the overall package of reforms will provide shareholders with access to better quality information and enable them to challenge excessive pay, while not imposing unnecessary regulatory burdens on a company.  The proposals will apply to the remuneration of directors in all quoted companies incorporated in England and Wales.

Key Proposals

Reporting and Transparency

The intention of the New Reporting Regulations is to make it easier for shareholders to find quickly the key information on pay contained in a company’s remuneration report.  Although quoted companies are already required to provide much of the information specified in the New Reporting Regulations, the focus is now on ensuring that this information is accessible, transparent and not buried in excessive detail.  For example, a company will now be required to provide a single, aggregate figure for each director’s pay, as well as detailed information in respect of salary, fees, bonuses, share options and pensions.

The binding policy report will need to include:

  • A table setting out the key elements of pay and supporting information, including how each element supports the achievement of the company’s strategy, its potential value and performance metrics.
  • Information on service contracts.
  • Scenarios for directors’ pay for performance that is above, on or below target.
  • Information on the percentage change in profit, dividends and the overall spend on pay.
  • The principles on which exit payments will be made.

The implementation report will require a company to report annually on how it has implemented its policy over the past financial year.  It must include the following:

  • A single, total figure for each director’s remuneration
  • Details of performance against metrics for long term incentives
  • The total pension entitlements for defined benefit schemes
  • The exit payments made in the year
  • Details on variable pay awarded in the year
  • The total shareholdings of directors
  • A chart comparing company performance and CEO pay
  • Information on who has advised the remuneration committee

The Government is considering whether to require a company to set out details of how shareholder views were taken into account in setting its remuneration policy as part of its consultation on the New Reporting Requirements.

Binding Vote on Future Remuneration Policy

The proposals in the Reform Bill intend to introduce the requirement for a new binding vote on a company’s future remuneration policy.  Payments to directors and other key employees will only be permissible in accordance with that approved policy.

The binding vote must be proposed to a company’s shareholders at least every three years, unless the directors decide to make a change to the policy, which will itself require shareholder approval.  The binding vote will require an ordinary resolution.  If the future remuneration policy is not approved, the company will have to continue to use the existing policy until a revised policy is agreed.

Advisory Vote on The Implementation of The Remuneration Policy

Shareholders will continue to take an annual, advisory vote on the implementation of the remuneration policy that will require an ordinary resolution.  If shareholders fail to approve the advisory vote, the company will be required to put its future remuneration policy to shareholder approval at the following year’s AGM.

Exit Payments

In response to widespread criticism of a number of high profile “rewards for failure” pay-outs to exiting company executives, the Government proposed as part of its March consultation that exit payments of more than one year’s base salary ought to require shareholder approval. 

However, BIS’ current proposal in the Reform Bill is less onerous.  It requires a company to set out its approach to termination payments as part of the future remuneration policy, which is then subject to the binding shareholder vote.  A company would then be bound by its approved policy in determining the pay of any departing director.

Impact on the UK Corporate Governance Code

The Financial Reporting Council has also announced that it will consult on possible changes to the UK Corporate Governance Code to address a number of issues relating to executive remuneration.  This includes determining whether or not, following a substantial minority vote against the binding or advisory vote, a company should be required to publish a statement setting out what it will do to address shareholders’ concerns.

Next Steps

The Government’s consultation on the New Reporting Regulations is open to responses until 26 September 2012.  It is proposed that the provisions will take effect for companies with financial years ending after October 2013. 

At the same time, the Government intends to work with the UK Listing Authority to consider whether the requirements of the Listing Rules should be reviewed.  The Government’s ultimate aim is to implement all reforms into law by autumn 2013.

The view the consultation please click here.  

© 2021 McDermott Will & EmeryNational Law Review, Volume II, Number 191

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