UK: Reluctant FRC Consults On Changes To UK Corporate Governance Code In Light Of Executive Remuneration Legislation

Last Updated: 17 October 2013
Article by Marlies Braun

On 2 October 2013, the Financial Reporting Council (FRC) published its consultation paper welcoming views on whether any changes needed to be made to the UK Corporate Governance Code (the Code) in light of the new legislation on voting and reporting on executive remuneration. 1

As reported in our May and July updates, the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations) 2 were published in August 2013 and came into force on 1 October 2013. Together with the Enterprise and Regulatory Reform Act 2013, the Regulations introduce, among others, the requirement for UK incorporated quoted companies (this includes Main Market companies but not AIM companies) to obtain shareholder approval in a binding vote of their directors' remuneration policy. The new rules have been supplemented by guidance published by the GC100 and Investor Group in September 2013 setting out best practice to assist companies and investors when implementing the new reporting requirements. 3

In a nutshell, the new remuneration reporting regime requires the directors' remuneration report of quoted companies to consist of (1) an annual statement from the chairman of the company's remuneration committee, (2) an annual report on remuneration, and (3) the directors' remuneration policy.

The annual report on remuneration is subject to an annual advisory vote and must in particular set out:

  • in a single total figure, the actual payments made to each director in the last two years, including total pension entitlements and scheme interests awarded during the financial year;
  • details of payments to past directors and payments for loss of office;
  • each director's shareholding and share interests;
  • how the company intends to implement the remuneration policy in the following financial year; and
  • details of the vote on the previous year's annual remuneration report and, where there was a significant percentage of votes against either the annual remuneration report or the remuneration policy, give a summary of the reasons for those votes, and any actions taken by the directors in response to those concerns.  

The directors' remuneration policy sets out the company's forward looking policy on directors' remuneration and must be approved in a binding shareholder vote at least every three years.

The Regulations and the provisions of the Companies Act 2006 (as amended by the Enterprise and Regulatory Reform Act 2013) are further supplemented by the remuneration provisions of the Code and, in relation to companies with a premium listing, the content requirements for directors' remuneration reports in the Listing Rules. The Financial Conduct Authority (FCA) recently consulted on proposed changes to the Listing Rules to avoid duplication and ease the administrative burden on issuers 4. As a result of the proposed removal of duplicative listing rules relating to directors' remuneration, if adopted, a premium listed UK incorporated company will only need to comply with the Regulations when making disclosures regarding directors' remuneration. Overseas companies with a premium listing which do not fall within the scope of the Regulations will, however, continue having to comply with the listing rules relating to directors' remuneration. The proposed changes are expected to come into force on 1 January 2014.

In relation to the Code as the remaining limb of the regulatory framework of directors' remuneration, the FRC is now consulting, albeit it seems reluctantly, on whether any changes need to be made to address potential issues relating to executive remuneration.  The FRC emphasises at the outset of its consultation that it "has not yet taken a decision on whether, in principle, changes to the Code are required" and is requesting "strong evidence demonstrating the need for change". The three issues which are the subject of the FRC's consultation are:

  • Extended clawback provisions. Should there be a Code requirement to comply or explain that companies have provisions to recover and/or withhold variable pay?
  • Remuneration committee membership. Should non-executive directors who are also executive directors in other companies sit on the remuneration committee?
  • Significant votes against the remuneration report. Should the Code contain an explicit requirement for companies to report to the market where they failed to obtain at least a substantial majority in support of a resolution on remuneration?

In relation to remuneration committee membership, the FRC consultation paper reveals that the percentage of FTSE 100 and FTSE 250 companies whose remuneration committee included non-executive directors who were also executive directors of other companies has continuously dropped in the last ten years to 31% and 15%, respectively. It also shows that the presence of an executive director on the remuneration committee does not appear to have any correlation with the level of shareholder dissent in terms of votes against the remuneration report, supporting the view (seemingly shared by the FRC) that no Code changes are necessary to address this issue.

The FRC's reluctance to make changes to the Code in relation to significant votes on a company's remuneration report is further underlined by its analysis of the existing rules and recommendations in the Stewardship Code, the Code and the guidance published by the GC100 and Investor Group.

If the outcome of the current consultation is that changes to the Code are needed, the FRC will conduct a separate consultation on the proposed changes in the first quarter of 2014 with a view of the changes applying to accounting periods beginning on or after 1 October 2014.


1 The FRC consultation paper on "Directors' Remuneration" is available at'-Remuneration-Consultation-Document.aspx.

2 The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (SI 2013/1981) are available at

3 The GC100 and Investor Group guidance is available at

4 The FCA consultation paper "Consequential Changes to the Listing Rules resulting from the BIS Directors' Remuneration Reporting Regulations and Narrative Reporting Regulations" is available at

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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