Disclosure of Directors´ Remuneration - Consultation Document

The DTI announced in October 2001 that it would be requiring quoted companies to report on directors’ remuneration and allow shareholders to vote on the company’s remuneration report. It issued a detailed consultation paper URN 01/1400 on 18 December 2001, containing draft regulations called the "Directors’ Remuneration Report Regulations 2002".

The Regulations will require the directors’ report of a quoted company to contain a remuneration report that contains specified information. The information will be prescribed in a new schedule 7A of the Companies Act. This schedule is very detailed, running to some six closely typed pages. Some of the information is already required by the Listing Rules, some is additional information. It is divided into two parts:

(i) Information not subject to audit, such as:

• membership of the Remuneration Committee;
• a statement of the company’s remuneration policy;
• performance graphs showing comparative data with comparator companies or indices over a five year period; and
• details of directors’ service contracts.

(ii) Information which is subject to audit:

• details of directors’ remuneration and benefits - pay, share options, long term incentive schemes, pensions, retirement benefits;
• details of compensation awards to past directors; and
• sums paid to third parties in respect of directors’ services.

Accordingly, the auditors report will need to report on certain parts of the information.

In terms of disclosure of actual remuneration, there is not much of a change from what is currently required by the Listing Rules. The big change is in relation to disclosures on policy and performance. It is proposed that there would need to be a set of disclosures to explain the policy behind the remuneration of each director and also a performance graph comparing the company's performance against companies in the equivalent sector. Also, it is suggested that further details would need to be disclosed, such as to the extent to which the remuneration committee discussed remuneration issues with any of the executive directors.

The proposal is that these changes would be effective for financial periods ending on or after 31 December 2002. This means that steps being taken by directors to set remuneration during the current year will be subject to disclosure next year and this is therefore something that listed companies should take into account in their procedures for setting remuneration this year.

The proposed changes would also require the directors’ remuneration report to be put to the vote at an AGM by ordinary resolution . The vote is described in the consultation paper as "advisory" only. This would mean that a vote against the resolution would not, as a matter of law, force a change to a director’s service contract or require a change to the remuneration policy. Obviously, in practice, the significance of a vote against will be the message that is sent to the Board about the shareholders' lack of confidence in their ability to set the remuneration properly.

In addition, the government is still considering whether there is a case for requiring companies to call a poll (as opposed to a vote on a show of hands) in respect of this resolution and to disclose the results of the poll on their websites and in annual reports.

There will be additional minor consequential amendments to the Companies Act.

The Regulations will apply to "quoted companies", incorporated under the Companies Act 1985. In this context, "quoted" means any company whose share capital has been included in the official list under Part VI of the FSMA or is officially listed in an EEA state, or admitted to dealing on either the New York Stock Exchange or NASDAQ. The Regulations will not apply to companies whose shares are traded on AIM; (there will, however, be certain additional, but less stringent, disclosure requirements for AIM companies). They will also not apply to companies incorporated in other jurisdictions which are listed on the official list.

In addition, there will be new regulations called the "Companies (Summary Financial Statement) Amendment Regulations 2002", which will come into force at the same time. These will require companies who issue summary financial statements to include in them specified parts of the directors’ remuneration report.

The FSA has said that it will amend the Listing Rules to avoid duplication. The document also says that the government will discuss whether there needs to be any consequential amendment to the Combined Code.

"© Herbert Smith 2002

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