New secondary legislation on reporting
In our September 2017 Quoted Company Newsletter, we covered the Government response to its Green Paper on corporate governance reform.
Amongst other things, the response notes that the Government plans to introduce secondary legislation for more corporate reporting on a number of areas. See the table below for the areas to be covered.
Proposed secondary legislation
- Section 172 reporting. That all companies of a significant size (public and private) explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to employee and other interests.
- Pay ratio reporting. That quoted companies report annually in their remuneration report on the ratio of CEO pay to the average pay of their UK workforce, explaining any year-on-year changes and how the ratio relates to pay and conditions across the wider workforce.
- Reporting on share-based incentives schemes. That quoted companies provide clearer explanations in their remuneration policies of the range of potential outcomes from complex share-based incentive schemes.
- Corporate governance for large private companies. That companies of a certain size disclose their corporate governance arrangements in their directors' reports and on their websites including whether they follow a formal code.
As regards timing, the response notes that the intention is to put the draft secondary legislation before Parliament before the end of March 2018, with the changes being brought into force by June 2018 and to apply for reporting years beginning on or after that date.
Proposed new Corporate Governance Code
In our December 2017 client briefing, we wrote about the FRC consultation on the UK corporate governance code (the Code). The consultation runs until 28 February 2018.
Key areas being consulted on are set out below.
Proposed Code - key areas of change
- Stakeholder, especially workforce, engagement
- Culture
- Succession planning and diversity
- Independence
- Remuneration
- Application to smaller listed companies
If the changes to the proposed Code go ahead in their current form it will likely lead to a number of changes to corporate governance reporting in annual reports. For example, disclosures on how a company applies the updated Principles of the Code, on how it has engaged with its workforce and other stakeholders, on actions it takes following significant votes against resolutions and on the work of its nomination committee.
As regards the various changes on independence including the need for the chairman to be independent and also the new application to smaller listed companies, these could require board changes in some smaller and larger companies.
The FRC's current intention is to publish a final version of the new Code by early Summer 2018, to apply to accounting periods beginning on or after 1 January 2019. For more on this, please see our December 2017 client briefing.
Updated guidance on the strategic report
We noted in our September and December 2017 Quoted Company Newsletters the FRC consultation on its Guidance on the Strategic Report. The proposed amendments to the guidance reflect the increasing focus on the need for businesses to consider their impact on society and wider stakeholders and to report more on the sustainability of their business over the longer term. In particular, the amendments aim to update the guidance to:
- Reflect changes to the strategic report requirements made by the non-financial reporting regulations (mentioned earlier).
- Enhance the linkage between section 172 of the Companies Act 2006 and reporting in the strategic report.
- Make targeted improvements to reflect recent developments in corporate reporting.
Comments on the consultation were requested by 24 October 2017. Subsequently, in December 2017, the FRC issued a press release stating that it will wait to publish the final guidance until after the Government has published its proposed secondary legislation on reporting on section 172 of the Companies Act 2006 (mentioned above).
For more, see our September and December 2017 newsletters.
Miscellaneous European Developments
We have been writing about this as a proposed directive for many years. In May 2017, the Directive was published in the Official Journal of the EU. Member States have until 10 June 2019 to implement it.
A key relevant area of the Directive relates to shareholder voting on pay which is already covered in the Companies Act 2006. Another area, that of shareholder identification, is already catered for in the Act's provisions on information about interests in a company's shares. Other areas of the Directive do not impact on AGMs or narrative reporting in the annual report (eg provisions on related party transactions and provisions as to transparency by institutional investors, asset managers and proxy advisers).
Given Brexit, whether or not the UK will chose to implement any aspects of the Directive that are not already catered for remains to be seen.
The proposed Directive on gender balance among non-executive directors of listed companies
Equally, we have noted this proposed directive for some years. It remains a proposal (centred around a goal of 40 per cent representation of the under-represented sex among non-executive directors of listed companies) albeit one that has stalled for quite some time due to the preference of several Member States for national measures.
