UK: New Corporate Governance Narrative Reporting Requirements For Companies Published

Last Updated: 1 August 2018
Article by David Collins, Richard Barham and Candice Chapman

Parliament has approved regulations which will require companies to include new corporate governance content in their annual reports where they meet specific qualifying conditions. The regulations will, in general, come into force on 1 January 2019 and apply to company reporting on financial years starting on or after that date.

The new requirements form part of the government's corporate governance reform strategy. This was developed, following a 2016 Green Paper, with the aim of strengthening UK corporate governance and building confidence in the way that large private and quoted companies are run. The strategy combines these new statutory reporting requirements with proposed changes to the FRC's UK Corporate Governance Code (also due on 1 January 2019) and other industry-led measures.

The regulations introduce six main new reporting requirements. Each requirement has its own qualifying conditions, so the impact of the regulations will vary from company to company.

1. Section 172(1) statement

Every large company will have to include a separate statement in its strategic report describing how the directors have had regard to the matters set out in sections 172(1)(a) to (f) of the Companies Act 2006 when performing their duties under section 172 during the relevant financial year (a section 172 statement).

A large company is a listed or unlisted company, including a subsidiary, which meets two out of three of (1) turnover of more than £36 million (2) balance sheet total of more than £18 million and (3) more than 250 employees. A smaller parent company may also qualify through the concept of consolidation.

The section 172 statement must be separately identifiable within the strategic report and made available on a qualifying website. Any disclosures made by a cross-reference to other parts of the annual report must be included with the statement if published on a different website.

The Department for Business, Energy and Industrial Strategy, in a Q&A document on the regulations, notes that a section 172 statement will typically include information on some or all of:

  • the issues, factors and stakeholders the directors consider relevant in complying with the section 172 duties and how they have formed that opinion;
  • the main methods the directors have used to engage with stakeholders and understand the issues to which they must have regard; and
  • information on the effect of that regard on the company's decisions and strategies during the financial year.

In terms of detail, the Q&A document notes that the section 172 statement should be meaningful and informative for shareholders, shed light on matters that are of strategic importance and be consistent with the size and complexity of the business.

The Financial Reporting Council will issue further guidance in a new version of its Guidance on the Strategic Report.

Section 172(1) Companies Act 2006

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.

2. Statement on extent of engagement with suppliers, customers and others

The directors' report of a large company (determined using the same test as for the section 172 statement) will have to summarise:

  • how the directors have had regard to the need to foster the company's business relationships with suppliers, customers and others; and
  • the effect of that regard (including on the principal decisions taken by the company during the relevant financial year).

Where this overlaps with the section 172 statement requirements, the directors' report can (where appropriate) cross-refer to the strategic report.

3. Statement on extent of engagement with employees

The directors' report of companies with more than 250 employees will have to summarise:

  • how the directors have engaged with employees;
  • how they have had regard to employee interests; and
  • the effect of that regard (including on the principal decisions taken by the company in the relevant financial year).

Where this overlaps with the section 172 statement requirements, the directors' report can (where appropriate) cross-refer to the strategic report.

4. Statement on corporate governance arrangements applied by certain large companies

Any private company and any public unlisted company with:

  • more than 2,000 global employees or a turnover of more than £200 million; and
  • a balance sheet total of more than £2 billion globally,

will have to include a statement in its directors' report (published on a qualifying website) stating which corporate governance code, if any, it has applied and how. The statement must describe any departure from any aspect of the adopted code and provide the reasons. If the company has not applied a code at all, it must explain why and what governance arrangements it has applied instead.

Listed companies which are already required to provide a corporate governance statement in accordance with the Disclosure and Transparency Rules are exempt from this requirement.

The Wates Corporate Governance Principles for Large Private Companies have been published in draft with the ambition of becoming the code which large private companies will choose to adopt – see Draft Wates Corporate Governance Principles for Large Private Companies published.

5. New reporting requirement for quoted companies on CEO pay gap ratios

A quoted company (i.e. not AIM traded) with more than 250 UK employees will have to publish in its remuneration report the ratio of its CEO's total remuneration to the median (50th), 25th and 75th percentile full-time equivalent remuneration of its UK employees. For a parent company the information must relate to the whole group.

Certain prescribed supporting information must also be published including:

  • an explanation of the calculation methodology;
  • reasons for any ratio change compared to the previous year; and
  • whether the ratio is consistent with wider policies on employee pay, reward and progression (and if so, why).

The methodology and reporting rules are prescriptive and must be followed carefully to ensure compliance.

6. New reporting requirement on the effect of share price growth on executive pay outcomes

A quoted company (i.e. not AIM traded) will in its remuneration policy (inside the report) have to:

  • include an indication of the maximum remuneration receivable by each executive director assuming a share price appreciation of 50% during the relevant performance period; and
  • provide a short description of the basis of the calculation.

It will also have to summarise any discretion that has been exercised on executive remuneration outcomes reported that year as a result of share price appreciation or depreciation during the relevant performance periods.

Comment

The new reporting regulations, the Wates Corporate Governance Principles and the planned changes to the FRC UK Corporate Governance Code signal a renewed focus on UK corporate governance frameworks. Some of these changes will impose more prescriptive requirements, and companies must review and update their corporate governance arrangements (including record-keeping, reporting and decision-making processes) as appropriate. Companies must also examine the varying qualification thresholds for each new rule carefully to ensure that all qualifying companies comply with the new requirements.

The Companies (Miscellaneous Reporting) Regulations 2018

The Companies (Miscellaneous Reporting) Regulations 2018 - Q&A

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