On 18 December, the GC100 and Investor Group published an eagerly awaited update to its Guidance on DRRs. The update follows the GC100’s review of its original Guidance (which was released in September 2013) in light of the 2014 AGM season and recent developments, and notes that the update document should now be regarded as part of the Guidance. The update highlights nine key areas – three of which are areas that “merit supplementary guidance”, with the remaining six being aspects that “can be clarified or emphasised to promote best practice” in future reporting.
Aspects that can be clarified or emphasised to promote best practice
- Discretion – The original Guidance recognised that remuneration committees may need to provide for discretion in genuinely unforeseen and exceptional circumstances. During the 2014 AGM season, a notable number of pre-AGM assurances were given by remuneration committees (such as those of Aberdeen Asset Management, Compass Group, GlaxoSmithKline, HSBC, IMI, Imperial Tobacco, Pearson, TUI Travel and Unilever – see our blog post on the publication of the first few assurances) in order to narrow discretions that had been included in the DRR and which investors had found to be too broad. The update notes that “the provision of such assurances is generally undesirable” and emphasises that a broad discretion to address unexpected developments over the three-year life of a remuneration policy “will be more likely to be approved if it is drafted and explained to make investors confident that it will be used only if and as genuinely required, and within an acceptable maximum (either the general, or a higher exceptional, maximum)”. One for the draftsman, then.
- Disclosure of performance targets – not a huge surprise that this one has been featured (it was also in the IMA’s recent letter (see our blog post)). In short, when commercial sensitivity is used to restrict the disclosure of performance targets, the GC100 expects retrospective disclosure of those targets once commercial sensitivity no longer applies.
- Individual remuneration component maxima – the update notes that there has been uncertainty at some companies as to whether the requirement to disclose the maximum that may be paid for each component of remuneration means that there has to be a disclosure at individual executive director level. The GC100’s position is that the regulations “clearly set an expectation that a maximum level of remuneration should be disclosed for each executive director, including the maximum possible level of bonus”.
- Shareholding requirements – the regulations require DRRs to note any requirements or guidelines regarding directors’ shareholdings in the company, and whether they were met. The update confirms that where long- or short-term incentives that are share settled themselves include requirements for shares to be retained after vesting, that fact should be included in the disclosure as to how the plan operates. The GC100’s update also states that investors generally expect that reporting should follow the original Guidance – in particular, how the remuneration committee enforces compliance with any shareholding requirements or guidelines should be disclosed.
- Linking remuneration to strategy – the regulations’ requirement to explain the link between remuneration and a company’s overall strategy applies to the policy table. However, investors “generally expect that this should be supplemented by relevant disclosures” in the DRR. The GC100 update suggests that “companies should take the opportunity to give this the appropriate emphasis and explanation in the annual statement from the chairman of the remuneration committee”.
- Clarity – the update notes that, whilst “there has been generally an improvement in the quality of remuneration reporting since the new reporting requirements were introduced”, companies “should continue to focus on clarity and conciseness”. In that regard, the update suggests that remuneration committees “may find it helpful to consider” (1) feedback from shareholders on the last remuneration report and policy, (2) what might make it easier for investors to assess and understand each part of a remuneration report (or policy) and (3) “whether the report clearly explains the thinking and purpose behind the committee’s decisions and choices”. Not a ground-breaking suggestion by any means!
Areas that merit supplementary guidance
- Assurances – the GC100 considers that any assurance published by a remuneration committee after the release of the DRR and before the AGM (see above) should be included on the company’s website (alongside the Annual Report), and the assurance should also be included in the following year’s DRR (as suggested by the IMA – see our blog post).
- Malus and clawback – the 2014 Corporate Governance Code has a toughened “comply or explain” requirement in respect of malus and clawback on short- and long-term incentive plans (see our blog post – and note that the GC100 references “and”, despite the Code referring to “or”… not a huge surprise given the FRC’s informal clarification that “and” is indeed correct). As the 2014 Code applies after most companies have had a three-year remuneration policy approved, the GC100 suggests that companies may wish to consider (in consultation with investors) either (1) deferring the extension of the provisions until the next scheduled policy renewal, (2) presenting a new policy with appropriate amendments or (3) interestingly, “devising some other solution, for which they may wish to seek appropriate advice (e.g. as regards any risk of making awards and payments “inconsistent” with approved policy)”.
- Policy disclosure – whilst the policy doesn’t need to be repeated in DRRs in years where it isn’t subject to a vote, the GC100 considers that “sufficient information should be included to help shareholders easily assess the reported remuneration in the context of relevant aspects of the policy”, and at least the policy table should be included in future DRRs. The full policy should, however, be on the company’s website (and signposted).
Overall, the GC100 believes that “a sound start” has been made to life under the new DRR rules, and “wishes to see this being built on progressively, with continuing improvement of both remuneration disclosures and the way that companies and shareholders engage on remuneration”. As such, the GC100 notes that it will continue to review the Guidance “from time to time” to ensure it remains relevant and useful.