FRC proposes tougher measures on exec pay in governance code

THE FRC is proposing tougher measures on executive pay as part of a consultation to amend the UK corporate governance code. 

The consultation seeks views on clawing back pay, whether non-executive directors who hold executive positions in other companies should be part of remuneration committees, and what companies should do if they fail to obtain at least a substantial majority in support of a remuneration resolution, Accountancy Age’s sister title Professional Pensions reports.

This comes after the FRC was asked by the government to consult on the code once its legislation on voting and reporting on executive remuneration has been finalised. The legislation, the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, came into force on 1 October.

On the clawback issue, the code currently says that “consideration should be given to the use of provisions that permit the company to reclaim variable components [of remuneration] in exceptional circumstances of misstatement or misconduct”.

The legislation that came into force yesterday requires companies to disclose in the directors’ remuneration policy if there are provisions for clawback, and to disclose in their annual reports the details of any sums recovered or withheld and the reason why.

However, in the latest consultation, the FRC asks whether the code provisions are sufficient or if the code should include a “comply or explain presumption” that companies have the ability to claw back pay.

It also asks if the code should specify the circumstances in which clawbacks should be used, and if there are any legal or practical barriers to companies using clawbacks.

On executive and non-executive committee members, the FRC asks whether the code should ban the appointment of executive directors to the remuneration committees of other listed companies, to prevent “personal interest” in “maintaining the status quo in pay setting culture” from influencing decisions.

The current code does not explicitly state how boards should respond if they fail to obtain at least a substantial majority in support of a resolution on remuneration, despite general guidance that the chairman should “ensure effective communication with shareholders”.

Given that the FRC states reporting of these incidents soon after an annual general meeting (AGM) s “crucial for effective corporate governance”, it asks in its consultation if a specific requirement on this should be written into the code.

FRC chairman Baroness Hogg (pictured) said: “The government’s new legislation underlines the importance of boards and investors engaging on directors’ remuneration. 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.”

If changes to the code are proposed in this consultation, those revisions will be subject to another consultation in the first quarter of 2014, with the new code coming into force in accounting periods beginning on or after 1 October 2014.

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