Essential Corporate News: week ending November 8, 2019

IA: Principles of remuneration 2020

On November 1, 2019 the Investment Association (IA) published its Principles of Remuneration 2020 (Principles) alongside an open letter to Remuneration Committee Chairs (Letter). The Principles replace the previous Principles which were last updated in November 2018. The Principles are designed to give companies clarity on IA members’ expectations on executive remuneration and have been updated to reflect current best practice and evolving views including the impact of remuneration on wider stakeholders, the consultation process and alignment of performance conditions with the company strategy.

The IA has made several amendments to the Principles, including:

• Remuneration structures– The Letter notes that for many years long term incentive plans have been introduced by companies and generally accepted by shareholders. However, IA members are increasingly of the view that these traditional schemes are not working as effectively as they could for all companies, and can sometimes drive outcomes which can cause concerns for shareholders such as increasing grant levels or volatile and significant vesting outcomes. The Principles state that although shareholders prefer simple and understandable remuneration structures, they will consider alternative remuneration structures if aligned to the company strategy.
• Discretion on vesting outcomes– The Letter notes that, in recent years the IA has seen a small number of cases where the vesting of long-term incentives has led to a very significant value being paid to a small number of individuals and highlights that in some of these cases, the remuneration committee had no ability to reduce the level of reward delivered to the individuals. The Principles have therefore been updated to include the recommendation that remuneration committees should consider introducing discretion into their incentive schemes 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 for their company and how it would be implemented on an individual basis.
• Pensions– The Principles state that from 2020, where the pension contributions for incumbent directors are above the majority of the workforce rate, IA members will expect remuneration committees to set out a credible action plan to reduce the pension contributions of incumbent directors to the majority of the workforce rate by the end of 2022. In addition, IA members expect that companies disclose in their remuneration report the pension contribution rate that they consider to be given to the majority of the workforce and the remuneration committee should also explain how this rate has been derived.
• Leaver provisions – The Principles state 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. In addition, IA Members expect that the notice period should commence immediately when a decision has been made that an executive has resigned or the board has decided that an individual is leaving the company. Annual 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.
• Pay for Performance – The Principles state that IA members continue to seek explanations as to why remuneration pay-outs are supported and require robust transparency on financial, strategic and personal targets so that the link between pay and performance can clearly be seen. IA members request that strategic and personal targets and outcomes are disclosed separately.

(IA: Principles of remuneration 2020, 01.10.19)

(IA: Letter of introduction for principles of remuneration 2020, 01.10.19)

BEIS Committee: Recommendations for reform to help avoid future corporate collapses

On November 4, 2019 the Business, Energy and Industrial Strategy (BEIS) Committee (Committee) published a letter to the Secretary of State with a series of recommendations on corporate governance, executive pay and bonuses and audit reform following its recent public evidence sessions examining the corporate collapse of Thomas Cook.

The letter makes a series of recommendations on the role of the board, clawback on bonuses, tackling late payments to small business as well as audit issues, including conflicts of interest and the use of ‘goodwill’.

 The Committee's recommendations include that:

• Changes are made to executive pension contributions to create a fairer system. The Committee expects that the FRC's successor will have a role to play in this area, alongside pressure from investors, stakeholders and remuneration committees.
• Executive bonus scheme arrangements should always use measures that are pre-defined and not ambiguous, or open to interpretation or favourable adjustment. The schemes should be designed to address a balanced assessment of company objectives, rather than to focus on one aspect of company health to the detriment of another. Particular care should be taken in the design of bonus arrangements to avoid any potential for ‘gaming’ the system merely to meet targets and generate bonuses. In addition, the Committee reiterates its previous recommendation that the Financial Reporting Council (FRC)’s successor develops guidelines on bonuses to ensure that they are genuinely stretching and a reward only for exceptional performance, rather than being effectively an expected element of annual salary.
• Provisions on clawback need to be strengthened and the scope of clawbacks extended, in statute if necessary. It recommends that all future performance bonus arrangements should be required to include appropriate clawback provisions for a suitable period.
• Accounting practices relating to goodwill and its impairment should be reviewed. The Committee also calls for the swift implementation of the recommendation in its April 2019 report on the future of audit that graduated findings be made mandatory.
• Greater diversity promotes more effective challenge and more informed decision-making and the FRC should provide improved guidance on this aspect in the context of board membership. It also recommends that the government prioritises legislation to ensure FTSE 100 companies publish their workforce data broken down by ethnicity and pay band.

(BEIS Committee: Letter to secretary of state, 04.11.19)

(BEIS Committee: Annex to letter, 04.11.19)

(BEIS Committee: Calls for measures to help avoid next corporate collapse, 04.11.19)

HM Treasury: Pensions (Amendment) Bill 2019-20

On October 31, 2019 the Pensions (Amendment) Bill 2019-20 (Bill), which is a private members’ bill, was published and had its first reading in the House of Lords.

The purpose of the Bill is to amend the Pensions Act 2004 and the Companies Act 2006 to remove the cap on compensation payments under the Pension Protection Fund and to require the approval of pension scheme trustees and the Pensions Regulator for the distribution of dividends.

The second reading, a general debate on all aspects of the Bill, is yet to be scheduled.

(HM Treasury: Pensions (Amendment) Bill (Private Members' Bill) 2019-20)

HM Treasury: The Prospectus Directive and Transparency Directive Equivalence (Variation) Directions 2019

On November 6, 2019 the Prospectus Directive and Transparency Directive Equivalence (Variation) Directions 2019 (Directions) were published. The Directions were made by HM Treasury in exercise of the powers conferred by regulation 2(1) and paragraph 9 of Schedule 1 of the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019.

The Directions make a few necessary amendments to the Prospectus Directive and Transparency Directive Equivalence Directions 2019 (Original Directions) in order to reflect the introduction of the Prospectus Regulation with effect from July 21, 2019.

The changes include:

• Renaming the Original Directions the Prospectus Regulation and Transparency Directive Equivalence Directions 2019.
• Replacing any reference to the Prospectus Directive with a reference to the Prospectus Regulation.
• Amendments to the Original Directions to provide that HM Treasury determines that the information requirements imposed by the national law of an EEA state are equivalent to the requirements under the Prospectus Regulation.

The Directions were laid before Parliament on October 28, 2019 and come into force on exit day.

(HM Treasury: The Prospectus Directive and Transparency Directive Equivalence (Variation) Directions 2019, 06.11.19)