Following on from it proposals for reform, which we reported on at the end of last year (Corporate Governance Proposals), the UK Government has now published draft regulations, (the draft Companies (Miscellaneous Reporting) Regulations 2018). The Draft Regulations will implement some of the proposals, in particular in relation to holding larger companies to account for the salaries they pay and to consider employee representation. The draft regulations include the following new requirements:
- Publication of CEO’s pay ratio: UK quoted companies with more than 250 UK employees will be required to publish the ratio of their CEO’s total remuneration to the median (50th), 25th and 75th percentiles pay remuneration of their UK employees in their directors’ remuneration report. Where the reporting company is a parent company, the pay ratio must relate to the whole group. This is to ensure that a fair reflection is given, even where more junior staff are outsourced to a service company. Such companies will also have to publish supporting information, including the reasons for changes to the ratios from year to year and, in the case of the median ratio, whether this ratio is consistent with the company’s wider policies on employee pay, reward and progression. There are various options for identifying the relevant employees and for the methodology in calculating the pay ratios, which do allow the company to use previously calculated gender pay gap information as a starting point. As with gender pay gap reporting, the narrative will be key, as the ratio will very much vary depending on sector, size of the company and variable remuneration structure of the CEO.
- Statement about engagement with employees: Companies with more than 250 UK employees will be required to include a statement as part of their directors’ report summarising how the directors have engaged with employees, how they have had regard to employee interests and the effect of that regard, including on the principal decisions taken by the company in the financial year. The aim is to ensure that UK employees are provided with information on matters which concern them as employees. There will be an exemption if the information is about developments which are in the course of negotiation and which, if disclosed would be seriously prejudicial to the company’s interests. Companies will also have to report on wider engagement with suppliers, customers and others in a business relationship with the company. This is limited to large companies (as defined in the draft regulations).
- Share price impact reporting: UK quoted companies will need to include some additional provisions in their directors’ remuneration report, including an illustration of the possible impact of future share price increases on executive pay outcomes linked to performance periods or other executive incentive periods of more than one financial year.
- Section 172 Statement: Companies which are already required to produce a strategic report, will need to include a statement in their strategic report of how the directors have complied with their duty to have regard to the matters in section 172(1) (a) to (f) Companies Act 2006 (CA 2006) (duty to promote the success of the company).
- Statement of corporate governance arrangements: Very large companies will be required to include a statement in their directors’ report about which corporate governance code, if any, has been applied by the company and how.
Subject to Parliamentary approval, the new requirements will apply to company reporting on financial years starting on or after January 1, 2019. The Financial Reporting Council has also published its revised UK Corporate Governance Code which considers methods of engagement with the workforce and other stakeholders, and ensuring that there are means for the workforce to raise concerns in confidence and, if they wish, anonymously.