- Proportionate disclosure regime (rights issues and SMEs)
- UK implementation of the Amending Directive
- US Congress amends securities laws to facilitate capital formation
- Proposed changes to the Takeover Code
- Withholding tax disclosure
- Executive remuneration – new votes and disclosures
- Consultations on the UK Corporate Governance Code, UK Stewardship Code and International Standards on Auditing
The government has announced measures on executive remuneration which are intended to "strengthen the hand of shareholders to challenge excessive pay whilst not imposing unnecessary regulatory burdens". This article examines the three key developments, and the timetable and implementation process for the reforms. Links to the relevant announcements and consultations are given at the bottom.
Impact and timing
The proposals apply to UK-incorporated "quoted companies", being those whose equity shares are listed on the London main market, the official list of another EEA state, or on the Nasdaq / New York exchanges. They do not apply to UK-incorporated companies on the AIM Market of London Stock Exchange plc, though developing market practice will no doubt be monitored closely by all major companies, advisers and shareholders.
It is anticipated that the legislative changes will come into force from October 2013 (though the timetable is not yet altogether certain, see below).
The three key developments
(1) Binding vote on remuneration policy
Shareholders are to be given a binding vote on a forward-looking remuneration policy at least every three years, and potentially more frequently if the company seeks to change its policy within that period.
Approval of a new policy will require the support of a simple majority of members voting on the resolution and not, as had been mooted, a higher threshold (possibly 65%). If a new policy is not approved, the company will either have to convene an EGM to put forward a revised version, or wait until the next AGM and continue to comply with the existing policy in the meantime.
A replacement schedule to the main accounts regulations (SI 2008/410, the "accounts regulations") will set out the reporting requirements for the policy, and a draft is being consulted upon. The government intends this to include a table specifying key elements of pay and supporting information, and differing scenarios for directors' pay in relation to financial targets.
(2) Advisory vote on implementation of remuneration policy
The amended accounts regulations will also prescribe the contents of a report on the implementation of the remuneration policy over the preceding financial year, including stating a single figure for the total compensation of each director.
The current annual advisory vote on the remuneration report as a whole will be retained for the implementation report, and if it is not passed by a simple majority then a binding vote on the remuneration policy will be triggered for the following year. The logic of this is questionable since it may be the implementation and not the policy itself which gives rise to shareholder concerns, and this right might even be used to raise unrelated concerns.
It is also proposed that a company should issue a statement to the market as to how it proposes to address shareholders' concerns where a substantial minority vote against the advisory resolution - the Financial Reporting Council ("FRC") is consulting on this alongside other potential changes to the UK Corporate Governance Code.
(3) Exit payments
The remuneration policy will identify the principles for future exit payments for directors, including whether the company distinguishes between different circumstances of leaving (such as retirement or on a change of control). The implementation report will state the company's actual practice in the preceding year.
Whenever a director leaves, the company will be required to publish a prompt statement setting out what exit payments that director has received, and shareholders will no longer have to wait until publication of the annual report and accounts.
All of this represents a major departure from the initial government proposal that any exit payment exceeding the equivalent of one year's base salary would need to be approved by a separate shareholder resolution. Exit payments will instead be brought within both the binding and advisory votes.
Various important points are still to be resolved or fully explained, including:
- how precisely the timing will operate for a new remuneration policy given that most AGMs are held 4 or 5 months into a financial year;
- whether directors' service contracts will have to be amended individually to comply with the new regime, or if existing contractual rights will be preserved until these expire; and
- how the single figure for a director's total pay is to be calculated to allow for meaningful comparisons across companies - the government consultation favours a methodology developed by the FRC's Financial Report Lab, but invites comments.
A draft Enterprise and Regulatory Reform Bill was published in May, but further detail is awaited. Currently, this draft merely removes from the Companies Act 2006 the clause preventing a person's entitlement to remuneration being conditional on the (advisory) vote on the directors' remuneration report, but this will not of itself introduce a binding vote. Substantive provisions are now being put forward for consideration at the committee stages, but are likely to change during the parliamentary process and we can report on the outcome in due course.
The consultation on the accounts regulations closes on 26 September 2012. The government believes that the amended regulations should be supplemented by guidance on the detail and type of information to be reported agreed between businesses and investor communities. Changes are also required to the Listing Rules, which currently provide for flexibility with long-term incentive schemes for directors.
A central justification for reform is that the current advisory vote has not proved effective. Interestingly, the current AGM season has shown a much greater willingness by shareholders to challenge executive remuneration, with significant adverse votes for the likes of WPP, Aviva, Trinity Mirror and Barclays.
Whether due to this or representations made on behalf of quoted companies, the final proposals have been simplified and diluted - particularly in relation to exit payments. The government is seeking to tread the fine line of empowering shareholders while avoiding the micro-management of companies.
Nevertheless, this package of reforms represents a very significant development, and quoted companies will have to review their remuneration strategies and amend their AGM documentation in readiness for October 2013.
- March 2012 shareholder voting rights consultation paper
- Enterprise and Regulatory Reform Bill and related materials
- June 2012 revised remuneration reporting regulations consultation paper
Daniel Hooke is a Senior Associate (PSL) in the Corporate Group of Field Fisher Waterhouse LLP in London.
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