Tougher rules on clawback of directors' pay
Yesterday, the Financial Reporting Council (FRC) launched a consultation on directors' remuneration which, amongst other things, seeks views on whether the current rules on directors' pay in quoted companies go far enough in relation to clawback arrangements. This comes after Vince Cable asked the FRC (the body responsible for promoting corporate governance and reporting in the UK) to revise the UK Corporate Governance Code (the "Code") to require all large public companies to adopt clawbacks, in the wake of continued concerns about directors remuneration.
As reported earlier in the week, new rules came into force on 1 October 2013 regarding the disclosure and approval of directors remuneration. These rules require companies to disclose in their directors remuneration policy if provisions for clawback exist, along with details and reasons behind any clawbacks. However, companies are currently not required to have a clawback mechanism in place. The current Code merely states that "consideration should be given to the use of provisions that permit the company to reclaim variable components [of remuneration] in exceptional circumstances of misstatement or misconduct". The FRC is now questioning whether this is sufficient or whether the Code should include a "comply or explain" presumption that companies have provisions in place to clawback variable pay, to encourage more companies to adopt clawbacks.
Of course, the requirement to have clawback arrangements in place is not new for financial institutions who are already subject to tough rules on directors' pay imposed by the Financial Conduct Authority and Prudential Regulation Authority. However, if similar provisions are extended to large and medium size public companies outside the financial sector, this will require many companies to review their remuneration practices and revise their current bonus scheme rules.
The consultation closes on 6 December 2013, with any changes to the Code being subject to further consultation in the first quarter of 2014. The FRC has indicated that the new Code would then apply to accounting periods beginning on or after 1 October 2014.