Experts warn governance reforms could prompt fundamental change

Bosses at 916 UK-listed companies will face tougher rules on bonuses and pay as the Financial Reporting Council (FRC) has issued an updated version of the UK’s Corporate Governance Code.

Under the revisions, companies will be able to recover or withhold variable pay and defer executive bonuses for longer periods of time.

The reforms could signal a shift towards non-cash bonuses, such as shares, as companies look to get around the rules, experts have predicted.

The guidelines – which are operated under the ‘comply or explain’ principle, and revised every two years – aim to make companies more accountable and transparent, to minimise the risk of high-level corporate failures.

The latest updates “are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation”, said, chief executive of the FRC, Stephen Haddrill.

Further amendments will require companies to explain how they intend to better engage with shareholders.

“Boards of listed companies will now need to ensure that executive remuneration is designed to promote the long-term success of the company and demonstrate how this is being achieved more clearly to shareholders,” the FRC statement read.

But Alexandra Beidas, employee incentives lawyer at Linklaters, said the changes to the ‘clawback’ rules would have the greatest effect on UK employers, and companies should think carefully about the impact on motivation where remuneration may be recovered long after payment.

“Most companies already have in place provisions for withholding pay in certain circumstances, but far fewer have anything on clawing back payments already made.

“The decision to leave it to companies to determine clawback events appropriate to them is to be welcomed, but companies will need to make some difficult decisions relating to issues such as trigger events for clawback, how long the clawback risk will last, how to structure variable deferred pay to ensure ability to withhold or recover sums in practice, and managing shareholder expectations,” she said.

The FRC also highlighted the importance of the board’s role in establishing the “tone from the top”, when it comes to culture and values.

“The key to the effective functioning of any board is a dialogue which is both constructive and challenging. One of the ways in which such debate can be encouraged is through having sufficient diversity on the board, including gender and race,” the FRC said.

Sandra Kerr, Race for Opportunity (RfO) director at BITC welcomed the inclusion of “and race” into the preface of the 2014 code for the first time. RfO had called for this amendment in its ‘Race at the Top’ campaign.  

Adrian Joseph of Google, and chair of RfO said this was “huge news” from the FRC, as they had the ability to “affect fundamental change in how organisations operate”.

The council said it would continue to consult on the issues for the 2016 report.

This year’s revised code will apply to accounting periods beginning on or after 1 October 2014.