On July 16th, 2018 the FRC published its latest revision of the UK Corporate Governance Code, which is in my view shorter, simpler and better.
The code can be read here: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF
A summary of the main changes is here https://www.frc.org.uk/getattachment/524d4f4b-62df-4c76-926a-66e223ca0893/Key-highlights-of-the-Code.pdf
The FRC have also published a report on their consultation about the Code which explains the changes and the arguments for and against specific changes https://www.frc.org.uk/getattachment/90797f4b-37a1-463e-937f-5cfb14dbdcc4/2018-UK-Corporate-Governance-Code-Feedback-Statement-July-2018.pdf
The changes to the Code complement the changes announced by Government in June 2018 to the Companies (Miscellaneous Reporting) Regulations 2018. The key points were:
- All quoted companies (and “large” companies) will be required to include a statement as part of their strategic report describing how the directors have had regard to the matters in section 172(1)(a) to (f) of the Companies Act 2006.
- All companies with more than 250 employees will have to:
- provide employees with information on matters of concern to them
- consult with employees
- have an employee share scheme or involve employees by some other means
- summarise in the annual report how directors have engaged with employees.
- Remuneration disclosure will have to:
- report on discretion used re pay
- show how much of long-term incentive payments were due to share price appreciation
- show the impact of a 50% share price increase in the illustration of CEO remuneration future outcomes (previously the assumption was no change in share price)
- provide pay ratio information for the ratio of CEO pay (Single Total Figure of Remuneration) to lower quartile, median and upper quartile pay of UK employees and explanation of the trends
The pay ratio information is initially for the latest year, but will increase so that after nine years there will be 10 years of data reported.
I lobbied that the average employee pay should be used as this is easier and cheaper to calculate and audit; and that the disclosure should be for 10 years from when the new rules are implemented. However, I was unsuccessful.
I also lobbied that the illustration of CEO remuneration future outcomes should include scenarios of the share price doubling and trebling. However, I was unsuccessful. Part of the reason for the very high Persimmon was the total shareholder returns of 6 times. Showing a 50% increase is a compromise, and in my view like many compromises, it is a bad one!
More information on the changes to these regulations is here https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/715740/corporate-governance-company-reporting-faq.pdf
The regulations will not become law until approved by Parliament. They should apply to financial years beginning on or after 1 January 2019.
Director – ShareSoc
With regard to the changes to the UK Corporate Governance Code in relation to Non Execs, it has slightly toughened up the 9 year rule (especially for Chairmen whose start date is now the day they were appointed onto the board, not the day they became Chairman) and companies either have to appoint a director from the workforce, or set up a formal workforce advisory panel, or have a designated Non-Executive Director with workforce responsibilities, so that might lead to more NEDs from an HR background; and there is a bit more emphasis on diversity and succession planning.