UK Corporate Governance Code – directors’ remuneration and re-election

Background

After an extensive consultation process, the Financial Reporting Council (FRC) has published the new UK Corporate Governance Code (Code).  The Code applies to all companies with a premium listing of equity shares, whether incorporated in the UK or elsewhere. These companies should include a statement in their annual financial reports indicating how they apply the principles of the Code.

Directors’ remuneration

The changes in the Code relating to directors’ remuneration include:

• Non-executive directors were previously prohibited from receiving options in case such options risked their independence. This prohibition now covers “other performance-related elements” of remuneration.
• Companies now have to consider using provisions that allow them to clawback remuneration from directors in exceptional circumstances of misstatement or misconduct.
• The Code now specifically states that remuneration and incentives should be compatible with risk policies and systems.
• The performance-related elements of executive directors’ remuneration should promote the long-term success of the company. 

Directors’ re-election

The issue which was most fiercely debated during the consultation process related to the re-election of directors. The compromise is to introduce annual re-elections for directors but to apply this requirement only to FTSE 350 companies, meaning that smaller premium-listed companies need not hold annual elections. The concern remains that annual re-elections will lead to short-termism which seems at odds with the Code’s emphasis on long-term success.

Conclusion

The amended Code is not ground-breaking but introduces some interesting changes. It may therefore be an appropriate time for remuneration committees to review their remuneration policies and ensure they comply with the Code.