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Employment Law

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18 SEP 2014

Updated UK Corporate Governance Code: Remuneration Changes

Updated UK Corporate Governance Code: Remuneration Changes
September 17th, 2014

The Financial Reporting Council (FRC) has today released an updated version of the UK Corporate Governance Code, which will apply to accounting periods beginning on or after 1 October 2014. As promised by the consultation, the new Code attempts to ensure that the financial interests of board members are aligned with the long-term interests of the company. Companies should “comply or explain”, i.e., if they are not following the Code, they should explain why.

Section D concerns remuneration. The key provision is D.1.1: “Schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so.” In other words, directors’ contracts should include malus or clawback provisions – concepts which will be familiar to those working in the financial services sector (see SYSC 19A of the FCA Handbook).

As regards non-executive directors: “They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning” (see A.4). D.1.2 provides: “Where a company releases an executive director to serve as a non-executive director elsewhere, the remuneration report should include a statement as to whether or not the director will retain such earnings and, if so, what the remuneration is.” D.1.3 provides that non-executive members of the board should not normally receive share options or other performance-related elements. They may do so with shareholder pre-approval, but there are dark warnings about independence, and the Code provides options should not be realised for at least a year after a non-executive director leaves his or her post.

On early termination, D.1.4 provides: “The aim should be to avoid rewarding poor performance. They [the remuneration committee] should take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss.” Finally, D.1.5 states that notice periods should be a year or less. There are provisions in respect of the process for making remuneration decisions in section D.2.

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