Brexit delay impacts remuneration reporting

The delay to Brexit has clearly impacted UK companies in several ways but one consequence is that they will unexpectedly need to comply with the Shareholder Rights Directive II (SRD II) as the Government has now published the draft legislation (The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019) which transposes SRD II into national law on 10 June 2019.

The good news is that most of SRD II is already part of the Companies Act and other UK reporting regulations, so the changes are relatively minor, but they come at a time when companies are already grappling with new disclosures such as the CEO pay ratio which came into effect for financial years commencing 1 January 2019 (see our previous briefing here).  As with many of the UK reporting regulations, AIM companies are not captured by the new rules.

In summary, the key changes companies need to be aware of are:

Scope

• ​Regulations come into force on 10 June 2019
• The regulations now have a wider scope so also capture “unquoted traded companies” - noting that there are very few UK registered companies which are traded but unquoted (for clarification AIM is not a regulated market under the definition of the Companies Act and is therefore not captured by these regulations)
• Requires the remuneration of the Chief Executive Officer or Deputy Chief Executive Officer to be disclosed even if they are not a Main Board Director – arguably an anti-avoidance mechanism to prevent de facto CEO’s from remaining below Board and thus escaping the restrictions of a shareholder approved remuneration policy although some European countries may see the Board as the exclusive preserve of the non-executive directors and, indeed, such practice is also relatively common in the UK mutual sector.  This is a point to note if considering giving someone the title of "Deputy CEO"

Voting - applies to Meetings on or after 10 June 2019

• Details of the approval of the relevant directors’ remuneration policy need to be available on the company’s website and retained “for as long as that information is applicable” – this applies for any policy approval on or after 10 June 2019 and should be viewed as an additional administrative provision alongside existing reporting requirements

Policy - applies to resolutions at Meetings on or after 10 June 2019

• ​The policy must explain the decision-making process followed for its determination, review and implementation, including measures to avoid or manage conflicts of interest and, where applicable, the role of the remuneration committee or other committees concerned except where this information is provided elsewhere in the Directors' Remuneration Report (DRR) – most companies already explain the membership and workings of the Remuneration Committee within the Annual Report on Remuneration section so we do not see this provision as requiring additional disclosure 
• Detail any deferral, vesting or holding periods – typically already disclosed so unlikely to require any further action
• Indicate the duration of directors’ service contracts or arrangements – service contracts are already generally disclosed in detail so we do not see this as requiring any further actions for most companies
• A revised policy must contain a description and explanation of all significant revisions – generally already a feature of most new policies so should not require any further action
• If a proposed policy is lost, the company must put a new policy to a shareholder vote at the next AGM or General Meeting – most likely to already be the case in practice but it is not currently required as a matter of UK law and, if a General Meeting is required for another issue (e.g. a Class 1 transaction), it will now trigger a new shareholder vote on the remuneration policy, even if the intention was to run the existing policy to the next AGM
• Any payment to a director outside of the approved policy can only be made once approval has been obtained for an amendment to the policy – previously payments could be made provisionally subject to a later ratification by shareholders for that specific payment, but it now has to be subject to an amended policy

Report - applies to financial years commencing on or after 10 June 2019

• Annual Reports to be made available on the website for a period of at least 10 years 
• Supplement the Single Total Figure table with additional columns showing total fixed pay and total variable pay – will require some reformatting to present in the prescribed manner
• Note any change to the exercise price or date of exercise for any share options held by directors – most likely to be the result of a capital structure change which will already be explained (as it will also impact the number of shares under award) so no further action required generally
• The percentage change in remuneration for the CEO disclosure is expanded to require the same disclosure for all directors (i.e. both Executive and Non-Executive) individually compared to the average percentage change of employees of the company (rather than Group as under the existing regulations) on a full-time equivalent basis and, according to the explanatory notes but not the draft regulations themselves, the company performance (as measured by total shareholder return). This is to include financial years beginning on or after 10 June 2019, so will build up over time - the current CEO percentage change disclosure has attracted very little attention and we suspect that this additional requirement will likewise go under the radar. The inclusion of annual percentage increases for Non-Executive Directors (where above inflationary periodic (less frequent than annual) increases are still common) will require some additional explanation but this should not be overly onerous. Perhaps the more meaningful change is that the provision to use a sub-set of employees has been removed, with the expectation that the data now uses all employees of the company (other than the directors) and normalisation to full-time equivalents. We would expect that most companies will continue to provide voluntary disclosure on a Group basis as the most meaningful comparison

Whilst we do not expect these changes to be overly onerous for UK main market companies, they do represent yet another piece of the remuneration reporting jigsaw. In trying to fit in all these new provisions (whilst under pressure from the Annual Report team to limit the number of pages devoted to pay), it can be easy to overlook a minor or obscure clause which, whilst not important from a overall reporting perspective, would mean the DRR is not fully compliant from a legal perspective. FIT is well placed to help you ensure your DRR is both legally compliant and telling your story in the most effective way. 

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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