UK’s FRC to consult on specific executive remuneration issues, including requirements for true “clawback”

In an earlier article we alerted directors to the possibility that companies may be required to get back remuneration they had already paid executives, if UK trends spread. In this article we look at the UK developments in more detail.

The UK Government has requested the Financial Reporting Council (FRC) to consult on three specific proposals, with the FRC to determine whether any further changes to the UK Corporate Governance Code (the Code) are required.

In a consultation paper released on 2 October (see HERE), the FRC outlined the areas for feedback – the first being whether to extend “clawback” provisions. The Code currently provides that companies should “give consideration” to the use of provisions that permit companies to reclaim variable components of remuneration in exceptional circumstances of misstatement or misconduct.

The FRC is now considering strengthening this to include a “comply or explain” presumption that companies have appropriate provisions in place to support clawback. Consideration is also being given to adopting the terminology currently used in the Regulations which distinguishes between recovering vested pay (i.e. true “clawback”) and withholding or forfeiture of unvested pay (i.e. “malus”) – see our article on the UK Regulations HERE.

The ASX Corporate Governance Council’s proposed amendments to the ASX Principles similarly confuse these two distinct concepts and could benefit from clarification (see our article HERE). Guerdon Associates will be making a submission to the Council along these lines.

The second issue the FRC is calling for views on relates to whether non-executive directors who are also executive directors in other companies should be “discouraged” from sitting on the remuneration committee – the apparent rationale being that “there is a perceived conflict as these individuals have a personal interest in maintaining the status quo in pay setting culture and pay levels”. (Note that the presumption that the status quo is inappropriate has not been tested in the UK by an independent body such similar to the Australian Productivity Commission.)

The FRC did not, however, say that the director would favour increasing pay levels for executives in the other company, particularly if they are to be “benchmarked” against that company in their own executive capacity. In any event, the UK’s current board and committee composition requirements (which, similar to Australia, require there be at least three independent non-executive directors on the remuneration committee) would seem an appropriate safeguard against the director inappropriately influencing pay outcomes.

Interestingly, the percentage of FTSE 250 companies whose remuneration committees include individuals who are also executive directors of other companies was only around 15% last year (which has steadily declined from around 40% in 2003). The FRC has also analysed the levels of ‘no’ votes on remuneration reports. There does not appear to be any correlation between companies with an executive director having a higher instance of no votes than those without.

This issue of perceived conflict has had little, if any, airtime in Australia and was not considered by the ASX Corporate Governance Council in its latest round of amendments to the ASX Principles. This may be because the instance of executive directors serving on other boards is not as prevalent in Australia. It may also be because the existing governance framework is thought to contain appropriate safeguards.

Finally, the FRC is seeking views on whether the Code should contain an explicit requirement for companies to engage with shareholders and report to the market on the outcome if they do not receive a substantial majority in support of the remuneration report. Again, this presupposes that shareholders’ votes against remuneration reports are based on sound reasoning and actually linked to issues with the company’s executive remuneration framework – we know that this is often not the case (see our article HERE). Any mandated engagement and reporting along these lines would, in our view, be of limited benefit.

Any changes to the Code would be likely to apply to accounting periods beginning on or after 1 October 2014.

© Guerdon Associates 2024
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