Keeping up to date: the Financial Reporting Council’s new Consultation
By Caitriona Flynn and Simon Patterson
In conjunction with our partners in Financial Services data:
Citypay Associates – Pay & Reward Consultants to the Financial Services Sector
As you read around the subject of ‘improved transparency’, ‘greater disclosure’ and so forth, below, spare a thought for those poor put-upon search firms trying to find management talent for growing UK companies in the teeth of a pay market here, stacked against them when it comes to pay opportunity.
Odgers Berndtson have said [Source FT] the issue was becoming a crisis for some companies: “There is genuine anxiety about losing executives to the US. It’s happening at chair, CEO, CFO and non-executive levels.”
There is no doubt executives are paid more (from 50%, generally, up to 2x to 3x more) in North America. The environment there is less hostile to ‘big pay’.
If companies start favouring a U.S. listing over London, that is not good for the UK – so one of the objectives for the Financial Conduct Authority (‘FCA’) and Prudential Regulation Authority (‘PRA’) is not just to play regulation hard-ball but to provide a greater focus on growth and international competitiveness.
Hence the London Stock Exchange’s CEO, Julia Hoggett, recently called for a fresh look at
how executives are paid in the UK, and in particular the role of proxy voting agencies.
The Financial Reporting Council (FRC) is doing an admirable job creating oversight on governance – the only way the UK will avoid yet more legislation. A very important part of the plan to keep the UK competitive, especially in Financial Services.
The consultation outlines a plan (long awaited) to issue a revised Code, part of a wider framework which aims to improve accountability and build trust amongst investors. This covers a lot of areas, not just executive pay, broadly aimed at supporting investment in and stewardship of business. The FRC is focusing on a board’s accountability. Changes to the Code are intended to apply to accounting years commencing on or after 1 January 2025.
There are a number of changes to the existing code proposed, including a ‘resilience statement’, an audit and assurance policy for Public Interest Entities (PIEs), consideration of how to apply the new Code in companies which are not PIEs and more on comply-or-explain to improve reporting on diversity, but we have not focused on those here:.
The main suggestions relating to executive pay from the FRC include:
- Malus and Clawback - the FRC are seeking to improve transparency through additional information to be included in remuneration reports, including a statement on whether the company has malus and clawback arrangements in place, the minimum period for applying them and why this minimum period suits the organisation, as well as whether they have been used in the last year (and the last 5 years);
- Changes to the quality of reporting - replacing the existing ‘Provision 40’ to remove the wording “clarity, simplicity, risk, predictability, proportionality and alignment to culture” with tighter wording stating that “the remuneration policy should be clear, identify and mitigate risks associated with remuneration, and ensure outcomes are proportionate and do not reward poor performance”
- New wording to state that remuneration outcomes should be clearly aligned to company performance, purpose and values, and the successful delivery of the company’s long-term strategy including environmental, social and governance objectives
- Improved disclosure and improvements in the quality of reporting around how policies, structures and performance metrics support company strategy including Environmental Social and Governance (‘ESG’) objectives, clarity on engagement with the workforce and how this has been taken into account in reaching pay outcomes.
On the 2nd of May the FCA said it had plans to abolish the stricter “premium” class of London stock market listing, and make it easier for company founders to keep control of businesses using US-style “golden shares”. No doubt, such a change is designed to change the fortunes of the London Stock Market (2,101 companies were listed on London’s main market in 2003, only 1,097 were trading on the exchange this last year). The average number of companies floated was 177 in 2008, it is now 66 a year on average [Source Dealogic].
We are grateful to our long-standing partners in Financial Services data: Citypay Associates – Pay and Reward Consultants to the Financial Services Sector
Simon Patterson
Managing Director
simon.patterson@remunerationassociates.com