FRC "considering case" for extending executive remuneration 'clawback' provisions, amongst other changes

The Financial Reporting Council (FRC), which oversees the Code, is consulting on three specific proposals (16-page / 380KB PDF), including requiring companies to reclaim variable executive pay in the event of misconduct and preventing the appointment of directors to the remuneration committees of other companies. It does not intend to revisit recent changes to the executive remuneration reporting regime.

Baroness Hogg, chair of the FRC, said that the body had not formed a view on whether the changes were necessary. There would be a further consultation before any proposals were taken forward, with the revised Code applicable to companies with accounting periods beginning from 1 October 2014, she said.

"The Government's new legislation underlines the importance of Boards and investors engaging on directors' remuneration," she said. "The FRC is undertaking this consultation to understand if there is a case for changes to the Code. There is no presumption on the FRC's part as to the outcome. All interested parties will have an opportunity to make their views known before we reach a final decision."

The UK Corporate Governance Code sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and shareholder relations. The Listing Rules, set by market regulator the Financial Conduct Authority (FCA), require all companies with a premium listing of equity shares on the London Stock Exchange to report on how they have complied with the Code in their annual report and accounts, and to explain where they have not applied the code. There is no legal requirement for private companies to comply with the Code, but they are encouraged to do so.

Company shareholders were given a legally-binding vote on executive pay from 1 October, for companies whose accounting period ended on 30 September, alongside the introduction of new remuneration reporting requirements. Annual reports must now contain more information about how directors have been and will be paid, along with information about how this relates to company performance. This information is intended to assist shareholders in deciding whether to approve the company's pay policy. The FCA is currently consulting on changes to the Listing Rules to reflect the new regime.

The FRC is seeking general feedback on whether the Code is compatible with the new reporting regime, including whether any of its current provisions are now redundant and should be removed. The Code currently deals with aspects of the design of performance-related executive remuneration, the process through which this should be set and certain disclosures relating to the activities of a company's remuneration committee.

In addition, the FRC is seeking feedback on three specific proposals. The Code currently states that companies should give "consideration" to the use of clawback provisions, allowing the company to reclaim variable remuneration in "exceptional circumstances of misstatement or misconduct". It is now considering adding clawback provisions to the main body of the Code, requiring companies to 'comply or explain' with recovery and withholding provisions. The revised Code could also specify the circumstances under which payments could be recovered or withheld, according to the consultation.

The FRC is also seeking views on whether changes to the Code are required to discourage the appointment of executive directors to the remuneration committees of other listed companies, as requested by the Government when the proposals were originally announced. The Code currently recommends that a remuneration committee should consist of at least three independent non-executive directors, or two in the case of smaller companies.

Finally, the FRC is seeking views on whether companies should engage with shareholders and report to the market on the outcome if they do not receive a substantial majority in support of the pay policy report, in addition to the requirements already set out in the Remuneration Regulations and industry code of practice. The regulations already require companies to include details of votes cast in relation to pay at the previous year's AGM, and to give a summary of the reasons for any "significant" votes against and any action taken by directors to address this.