Included in this issue of our Governance & Compliance Update: Investment Association's updated Principles of Remuneration; FRC publishes annual review of Reporting and Governance and open letter; and more...

Investor Guidance and Guidelines

Investment Association's updated Principles of Remuneration

The Investment Association (IA) has published an updated version of its Principles of Remuneration (Principles). It has also sent a letter to the Chairs of remuneration committees which outlines they key changes to the Principles and to highlight areas of focus prior to the 2020 AGM season. In doing so, the IA reiterates its belief that a high level of executive remuneration is a "reputational risk to companies, individual directors and their shareholders". For that reason, the IA believes it is increasingly important that remuneration committees are considering the wider employee pay context and fairness of executive pay when setting pay levels and deciding on remuneration outcomes. 

Alternative remuneration structures / LTIs

IA members are increasingly of the view that traditional Long Term Incentive schemes (LTIs) are not working as effectively as they could and can sometimes drive outcomes which can cause concerns for shareholders such as significant vestings. Thus the IA are encouraging all remuneration committees to evaluate their remuneration structures to ensure that they appropriately align with the implementation of the company’s strategy – the LTIP section of the Principles has been updated to recommend that the performance period for LTIPs should be clearly linked to the timing of the implementation of strategy, which should be no less than three years, if not longer. In addition, the Principles now state that shareholders will consider alternative remuneration structures if aligned to company strategy.

Discretion on vesting outcomes

The discretion section of the Principles of Remuneration has been updated to include the suggestion that remuneration committees should introduce discretion into their incentive schemes which would allow them to limit vesting outcomes if a specific monetary value is exceeded. IA members consider it appropriate for individual remuneration committees to decide on the level at which such a discretion would be suitable and how it would be implemented on an individual basis. 


The IA’s aim, as previously stated and now set out in the Principles, is for pension contributions for executive directors to be aligned with those provided to the majority of the workforce. The IA expect remuneration committees to set out a credible action plan to reduce the pension contributions of incumbent directors to the level of the majority of the workforce by the end of 2022. 

In addition, remuneration reports should set out the pension contribution rate which the remuneration committee considers to be given to the majority of the workforce and how this rate has been derived.

Shareholding / post-employment shareholding requirements

The IA expects post-employment shareholding requirements to be introduced for all new policy approvals. 

The Principles have also been updated to recommend that post-employment shareholdings should be maintained for at least two years after a director has left the company (previously the Principles were unspecific about the period).

A new section on leaver provisions has been added to the general guidance in the Principles. This recommends that payments made to departing directors for payment in lieu of notice should only consist of contractual entitlements and be limited to salary, pensions and any benefits and reflect the length of the notice period. Bonus payments should only be paid to good leavers and deferred bonuses should continue to be settled in shares on the normal deferral schedule. Companies should disclose if a director is a good or bad leaver and the reasons for the company giving the director that status.

Levels of remuneration

The IA state that it is essential that companies adequately justify to investors the level of remuneration paid to executives. Investors will continue to look closely at how any increases to basic salary or variable pay opportunity are justified, and will expect remuneration committees to show restraint in relation to overall quantum. The IA continues to be concerned by incremental increases to both fixed pay and variable pay opportunity which, on aggregate, can lead to substantial increases in overall remuneration. 

Pay for performance

To justify remuneration pay-outs, remuneration committees should be transparent on financial, strategic and personal targets so that the link between pay and performance can be seen clearly. Strategic and personal targets and outcomes should be disclosed separately.

Glass Lewis publishes 2020 Voting Guidelines

Glass Lewis has published its 2020 proxy voting guidelines (Voting Guidelines) with changes reflecting, in many areas, the 2018 UK Corporate Governance Code (2018 Code) and with which Glass Lewis expects to see the emergence of widespread compliance and / or reporting against its provisions in 2020. In doing so, Glass Lewis acknowledges the 2018 Code's stated desire for investors and proxy advisers to move away from a "prescriptive approach" to comply or explain, instead paying due regard to a company's individual circumstances when evaluating performance.

Changes to the Voting Guidelines include:

  • Gender diversity: Glass Lewis will recommend a vote against the chair of the nomination committee at any FTSE 350 board that has neither met the 33% gender diversity target set out by the Hampton-Alexander Review nor disclosed any cogent explanation or plan to address the issue.
  • Board Skills: Glass Lewis now include board skills matrices in their analysis of director election proposals at all companies listed in the FTSE 350 (previously, the FTSE 100). To that end, they may recommend voting against the chair of the nomination committee if a board has not addressed major issues of board composition, including the composition, mix of skills, and experience of the non-executive element of the board.
  • Audit committee: Glass Lewis will consider recommending a vote against the election of the chair of the audit committee at any FTSE 350 company (excluding investment trusts) where the audit committee has, without explanation, failed to hold a minimum of three meetings during the year under review.
  • Board composition: Reflecting the 2018 Code which no longer makes certain exceptions for smaller companies, Glass Lewis now expect boards at premium-listed companies outside the FTSE 350: (i) to be at least 50% independent (previously the expectation was 33%); and (ii) to hold annual, rather thanstaggered, director elections. In 2020, explanations in lieu of compliance where a board has so far failed, but still intends, to meet the enhanced board independence expectation set out by the Code will be accepted. In the absence of both, a recommendation to vote against non-independent directors may be appropriate. Beginning in 2021, however, Glass Lewis will generally expect boards to have had enough time to meet the Code's independence provision without the need for transitional explanations in lieu of compliance.
  • Salaries and pension increases: Glass Lewis generally expect salary increase and pension contribution levels to reflect those awarded to a company’s wider workforce.
  • Incentive plan limits: Glass Lewis expect all incentive plans to feature clear and transparent award limits, ideally expressed as a multiple of base salary per employee.
  • Post-exit shareholdings: The guidelines include post-employment shareholding requirements among the best practice features generally expected of remuneration policies.
  • LTI vesting thresholds: It is expected that LTI plans should allow for no more than 25% vesting for threshold performance.
  • Remuneration committee discretion: The guidelines expect that remuneration committees should consider exercising downward discretion where a company has suffered an exceptional negative event, even if formulaic targets have been met.
Report urges companies to move from LTIPs to deferred shares

A think tank, the Purposeful Company, has published a report on deferred shares and the alignment of executive pay to performance. This was an issue referenced in the IA's restated Principles. The report is based on a survey of investors and companies, interviews with shareholders, asset managers, companies, proxy advisers and remuneration consultants as well as academic research that looked at companies using deferred share schemes. The report concludes that a quarter of British companies should consider shifting their executive remuneration policies away from LTIPs and towards restricted share awards.

Narrative Reporting

FRC publishes annual review of Reporting and Governance and open letter

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Governance and Reporting 2018/19. Is has also written to Chairs of audit committees and finance directors highlighting the reporting improvements it expects to be made based on its Annual Review. 

The review is based on the FRC's monitoring work in the year to 31 March 2019, predominately relating to the annual reports of those with 31 December 2017 year-ends, recent thematic reviews and the work of the FRC's Financial Reporting Lab. The FRC has also undertaken an assessment of both early adoption of the new Code and reporting on the 2016 Code, intending to publish its findings and expectations for reporting in this area later in the year.

General reflections and enforcement
  • The FRC notes various areas in need of improvement particularly as regards forward-looking statements, the potential impact of known and emerging risks and opportunities on future business strategy and the carrying value of assets and the recognition of liabilities.
  • Companies generally respond well to FRC enquiries, even where those enquiries go beyond what is strictly required by a reporting standard. Such interventions often resulted in undertakings from companies to improve the clarity of their disclosures in subsequent years and, in more serious cases of non-compliance, to reference FRC intervention in subsequent annual reports. Two cases were re-opened where the FRC considered that relevant companies had failed to address the undertakings they had given.
  • While the FRC welcomes the findings of the Kingman review as regards its enforcement work and notes its suggestions for granting it additional powers, it states that these are unlikely to be in place "in the short term" given the need for changes to primary legislation.
Financial reporting
  • Whilst the FRC expresses some disappointment that the most frequent areas of enquiry remain the same as in past years, the nature of these enquiries has changed and there has been an improvement in quality in most areas.
  • The most frequent area of challenge remains in relation to judgements and estimates. While most companies are now adequately distinguishing between the two, FRC intervention often sought a better articulation of the disclosures and how they can best inform investors.
  • The FRC continues to find errors in cash flow and related statements, many of which inflated cash generated from operating activities at the expense of investing or finance activities.
  • There had been a generally positive response to the challenge posed by the new IFRS 9 and IFRS 15 accounting standards. There is, however, "plenty of scope for improvement" in the clarity of disclosures around both loan loss provisions and the comprehensiveness of the accounting policies for revenue recognition.
  • The disclosure of contingent liabilities or provisions was also an area of concern, either due to missing or unclear disclosures, or where the information disclosed in the provisions note appeared inconsistent with information provided elsewhere.
Narrative reporting
  • The FRC continues to challenge companies about the completeness of their principal risks and uncertainties disclosed in strategic reports particularly where matters disclosed elsewhere in the annual report, or externally, indicated a significant risk that was not identified in the strategic report.
  • The FRC challenged annual reports containing business models which appear subject to significant climate change risk but where no such risk was disclosed.
  • Strategic reports which did not appear to give a fair, balanced and comprehensive analysis of the development and performance of the business during the year were also challenged – for example where business reviews failed to discuss the performance of recent acquisitions or the progress of transformation programmes.
  • The FRC continues to see too many cases of absent or unclear definitions of Alternative Performance Measures and their reconciliation to the closest equivalent IFRS line item. It encourages all companies, and not just those obligated to do so, to follow the ESMA Guidelines on the subject.
  • Many companies are failing to satisfy the Non-Financial Information Statement requirements. The FRC believes that companies need to present the content in a manner that is clear and accessible and give more focus to the reporting of the impact of the company's business on the environment, as well as risks that environmental matters may pose to the company itself.
Letter to Chairs of audit committees and finance directors

The FRC's letter rehearses many of the issues noted above. It also repeats the recommended disclosures for s.172(1) Statements as set out in the Department of Business, Energy and Industrial Strategy's (BEIS) Q&A on the 2018 Miscellaneous Reporting Regulations.


AIM prepares for a "no deal" Brexit

The London Stock Exchange has published AIM Notice 57, which updates AIM Notice 55 regarding the proposed changes to its AIM Rulebooks that will apply in the event of a no-deal Brexit on 31 January 2020. Marked-up versions of the AIM Rules for Companies and the AIM Rules for Nominated Advisers have also been published.

Other news

The Pension Schemes Bill: widening the powers of Pension Regulator

The Government has published the Pension Schemes Bill in which it is consulting on strengthening the Pension Regulator's powers, so as to enable it to fine and/or criminalise corporate decision-makers whose actions prejudice the position of pension schemes. Financial penalties could be up to £1m and the new criminal offences could carry fines and render those convicted liable to imprisonment for up to seven years. For further detail see our Pension team's alert. The General Election means it is uncertain whether and when the Bill will be taken forward but, at present, there appears to be cross-party consensus for its proposals. 

Commons committee calls for audit reform after Thomas Cook collapse

The Business, Energy and Industrial Strategy Committee (BEIS Committee) has proposed a series of recommendations on corporate governance, executive pay and bonuses in light of the collapse of Thomas Cook. In a letter to Andrea Leadsom, the Business Secretary, the BEIS Committee calls for the government to, among other things, push ahead with proposed legislation to replace the FRC in accordance with the recommendations of the Kingman review, reform auditing and tackle late payments to small businesses.

CLLS publishes Q&A on the PSC regime

The Law Society and the City of London Law Society, have jointly published a Q&A document in relation to the Register of Persons with Significant Control (PSC) regime. The purpose of the Q&A is to highlight certain areas of complexity within the regime which are not specifically covered by the legislation or the related guidance issued by BEIS.

Key Contacts

Richard Preston

Richard Preston

Managing Associate, Governance and Compliance
London, UK

View profile