In the second part of our RemCom series, we’re looking at another significant update to the Corporate Governance Code: an extended edition of Board Effectiveness Guidance.
We’ve done the heavy lifting here; but there’s still a lot to take in. So put that tray table up and prepare for take-off…
First, the changes apply to all premium listed companies (whether or not UK incorporated) in relation to accounting periods beginning on or after 1 January 2019.
Overall, the spirit of the updates suggests a heightened importance of a Company’s duty to take a more meaningful approach to fairness, rigour, transparency, wellbeing and reporting.
Updated Board Responsibilities
The Board’s responsibility is further clarified and broadened placing greater focus on several key areas, including:
Greater engagement with a wider range of stakeholders, especially employees
Ensuring the overall corporate purpose and strategy is aligned with a healthy corporate culture
Diversity, inclusion, and gender balance, both at a senior management level and as applied to a talent pipeline
A duty of care that directors' time commitment to their roles is not excessive
Fairness and proportionality in pay, in areas such as comparable benefits for executives and employees (eg. pension contribution rates), ensuring poor performance is not rewarded, enforcing directors' obligations to mitigate loss, and avoiding variable pay design that might increase reputational risk (eg. target-based rewards that drive unwanted behaviour)
Updated Remuneration Committee responsibilities
The role of the Remuneration Committee is also clarified, and includes more robust requirements around governance, application of rigour in pay frameworks, and clearer guidance on the composition of the RemCom.
Composition of the Remuneration Committee
Requirements have been clarified to stipulate that FTSE 350 companies must have a minimum of three independent non-executive directors on the Remuneration Committee (and two independent non-executives for smaller companies).
Remuneration Committee Chair
It seems prior experience of working on a RemCom before assuming the important role of Chair has now been given the importance it merits. It is now a requirement for the Chair of a Remuneration Committee to have been a Remuneration Committee member (not necessarily the RemCom) for at least 12 months prior to appointment.
Remuneration Committee’s remit
Changes here are not significant but do clarify the need for a Remuneration Committee to be clear on the scope of its responsibilities, including the explicit authority to determine (rather than recommend) executive pay, now more clearly defined as “the first layer of management below the board, including the company secretary”.
In addition, greater emphasis is placed on the Remuneration Committee’s role in the formulation, management and reporting of remuneration policies and practices. The requirement that “performance-related elements should be clear, stretching, rigorously applied and aligned to the successful delivery of strategy” has been removed.
What should you do?
I’d strongly advise you to review your existing Remuneration Committee Terms of Reference and your pay and reporting procedures, and agree appropriate changes in line with both aspects of these updates – Exec Pay Ratio Reporting and Board Effectiveness.
Even if your company is not in scope, choosing to adopt these principles early will send a clear message to employees, shareholders and customers that you take corporate governance seriously, and as legislation continues to evolve further (which it undoubtedly will) you will be ahead of the game!
If you’d like to talk about Exec Pay at your organisation, please email email@example.com or call 020 3457 0894.
We’re running a morning coaching session on 16th October and 7th November at the Shard. These sessions are designed for HR Directors and Heads of Reward who are responsible for Remuneration Committees and looking to develop a combination of expert technical advice and negotiation skills.
For more info and to sign up, visit the event page
Delivered by experienced RemCom coach and Chair of Rem Deborah Rees-Frost, these short but highly structured sessions offer a great return on your time investment, and are accredited as Chartered Professional Development.
After completion, you will be able to handle complex situations with confidence, and add value to your RemCom and Board.