Essential Corporate News – Week ending 1 March 2024

Investment Association: Letter to Remuneration Committee Chairs re the IA’s Principles of Remuneration

On 23 February 2024, the Investment Association (IA) sent a letter to FTSE 350 Remuneration Committee Chairs with an update on the IA's Principles of Remuneration, which were last published in November 2022. The IA is conducting a fundamental review of the Principles of Remuneration and an updated version will be published later in 2024.

The purpose of the letter is to let recipients know about the issues the IA will be considering during the review and main themes for 2024. These include the following:

Inflationary environment

The IA notes that there was strong alignment between shareholders and remuneration committees in 2023 with regard to the approach to the inflationary environment and, while inflation has fallen, investors still expect companies to remain cautious in 2024. As a result, companies should make it clear how they have considered salary increases for executives in the context of all-employee salary increases, the impact on total remuneration for the executives and put executive remuneration in the context of the stakeholder experience.

Competitiveness of UK remuneration practices

The IA notes the debate in 2023 on the competitiveness of remuneration in the UK and the impact of investor expectations on remuneration in the UK compared to other jurisdictions. It states that since its members want the UK to be a competitive place to list and remain listed, its members are keen to understand the key issues around remuneration that need to be considered. From discussions of the Principles of Remuneration with FTSE 350 companies and their views on the competitiveness of remuneration in the UK, the IA comments that while there is no consensus on one single issue which could be resolved to improve competitiveness, companies highlighted the following three themes:

• Need to increase pay opportunities through LTIP grant levels - some companies (particularly the UK’s largest companies and those that have a significant US presence or revenues) highlighted the challenges in attracting US executives and competing in the US market. They would like to see more flexibility to offer higher LTIP awards to create a competitive remuneration structure.
• Use of Hybrid schemes – some companies that can use such schemes in the US and other jurisdictions, want to use hybrid schemes for their executives which incorporate both performance and restricted shares.
• Requirements in the UK Corporate Governance Code reduce the perceived value of remuneration – the UK Corporate Governance Code includes requirements which extend the long-term perspective of directors through remuneration such as increased holding periods, shareholding guidelines, post-employment shareholding guidelines and malus and clawback. While companies accept that, individually, these measures increase the long-term alignment of executives and shareholders, in aggregate some companies believe that the perceived impact on the value of remuneration received is disproportionate.

The IA notes that some companies are currently consulting with their shareholders on the impact of these issues and states that shareholders are willing to consider proposals on quantum and hybrid schemes given the individual circumstances of these companies. Investors will assess proposed changes on a case-by-case basis, paying particular attention to the context of the company and the rationale articulated when deciding on the appropriateness for a particular company.

Review of Principles of Remuneration

The IA reminds companies that the Principles of Remuneration are principles, not rules, and through shareholder engagement, companies should choose the remuneration structure most appropriate for their business and strategy and choose the remuneration approach which the directors consider will deliver business performance and long term returns to shareholders. However, it notes that companies have stated that the guidance which underpins the Principles can be simplified to remove prescription and duplication of the UK Corporate Governance Code.

In light of feedback received and the evolving views of IA members on quantum and hybrid schemes, the IA will update the Principles of Remuneration in 2024 to simplify them, ensure that they are supporting a competitive market and delivering the right outcomes for both shareholders and their underlying clients. The IA states that it will ensure that current market practice and expectations of its members lead to the evolution of the Principles, rather than the Principles dictating market practice.

Priorities for 2024 AGM season

The IA anticipate that productive conversations on remuneration practices in the UK will be a key focus for 2024, as well as how Remuneration Committees are adapting to the inflationary environment. In addition, in the current market environment, Remuneration Committees should demonstrate how the remuneration outcomes are appropriate given the performance achieved during the year, as well as how the Remuneration Committee has set targets for 2024.

(Investment Association, Letter to Remuneration Committee Chairs, 23.02.2024)

FRC: Policy Update – Launch of UK Stewardship Code 2020 review

On 27 February 2024, the Financial Reporting Council (FRC) announced a fundamental review of the UK Stewardship Code 2020 (Stewardship Code) to ensure it supports growth and the UK’s competitiveness. This follows its announcement of new signatories to the Stewardship Code on 21 February 2024.

The review will focus on, amongst other topics, the extent to which the Stewardship Code:

• supports long term value creation through appropriate investor-issuer engagement that drives issuers’ prospects and performance;
• creates reporting burdens on issuers as well as Stewardship Code signatories; and
• has led to any unintended consequences, such as short-termism in targets and outlook for issuers.

The review is to be undertaken in three phases:

• Phase 1 will be a targeted outreach, focussed around the four main groups affected by the Stewardship Code’s principles and application, namely issuers, asset managers, asset owners and service providers, on the topics outlined above. The FRC expects these outreach discussions to uncover a range of issues that will inform the second phase.
• Phase 2 will be a public consultation, which the FRC plans to launch after the 2024 AGM voting season, during the summer of 2024.
• Phase 3 will be publication of the revised Stewardship Code, likely to be in early 2025.

(FRC, Policy Update – Launch of UK Stewardship Code 2020 review, 27.02.2024)

FTSE Women Leaders Review: Achieving Gender Balance 2024

On 27 February 2024, the FTSE Women Leaders Review, the third and successor phase to the Hampton-Alexander and Davies Reviews, published its latest report on progress for women serving on boards (Women on Boards), and for women in the two senior management layers below the board (Women in Leadership), at FTSE 350 companies and the 50 largest UK private companies.

Headline figures are as follows:

• Women on Boards of FTSE 350 companies is at 42%. There are no longer any FTSE 350 all-male boards.
• Women hold 35% of all Leadership roles in FTSE 350 companies but need to reach the target of 40% by the end of 2025.
• 56% of FTSE 350 companies have achieved or are well on their way to achieving gender balance but almost half of all available appointments now need to go to a woman to meet the 40% Women in Leadership target by the end of 2025.
• Further positive progress was reported in the drive to have at least one of the four key decision-making roles of Chair, CEO, Senior Independent Director (SID) and Finance Director held by a woman by 2025. On FTSE 350 boards, the number of women in the SID role, has increased significantly from 37% to 47% year-on-year but progress in the Chair and CEO role across the FTSE 350 has remained largely flat with marginal gains offset by losses elsewhere.
• The number of women on FTSE 100 Executive Committees has reached 30% and around a quarter of all FTSE 100 Finance Director and Chief Information Officer roles are now held by women. The number of all-male Executive Committees in the FTSE 350 has reduced to nine, from 54 in 2017. In the top 50 private companies, the representation of Women in Leadership has risen to 36%, while progress for Women on Boards is at 31% and has remained flat in the year.
• In terms of international comparisons, the UK ranks second only to quota-led France and ahead of Norway.

The recommendations of the FTSE Women Leaders Review continue to be the following:

• The voluntary target for FTSE 350 boards and for FTSE 350 Leadership teams is a minimum of 40% women’s representation by the end of 2025.
• FTSE 350 companies should have at least one woman in the Chair or SID role on the board, and/or one woman in the CEO or Finance Director role in the company by the end of 2025. All companies should increase their efforts to understand and remove bias from the selection process on board and leadership appointments.
• Key stakeholders, such as the Investment community and corporate governance agencies should continue to set best-practice guidance, or have in place alternative mechanisms as appropriate, to encourage any FTSE 350 board that has not yet achieved the 33% target for 2020, to do so. In addition, FTSE 350 boards below 33% women, should look to the under-represented gender when considering additional appointments.
• The scope is extended beyond FTSE 350 companies to include the largest 50 private companies in the UK by sales.

(FTSE Women Leaders Review: Achieving Gender Balance 2024, 27.02.2024)

(FTSE Women Leaders Review, Continuing growth in women’s representation at the top of British business but a step-change is needed by some companies to deliver gender balance, 27.02.2024)

Parliament: Call for evidence launched into the impact of the Modern Slavery Act 2015

On 28 February 2024, the House of Lords Select Committee on the Modern Slavery Act published a call for written evidence for its inquiry into the impact and effectiveness of the Modern Slavery Act 2015.

The House of Lords Select Committee on the Modern Slavery Act was appointed on 24 January 2024 and will report by 30 November 2024. It will consider the impact of the Modern Slavery Act, and its effectiveness in achieving its aims. It will also consider how its provisions have been implemented, how it has been impacted by recent political developments, and whether it requires improvement.

The Select Committee is seeking submissions relating to any or all of the following topics:

• The extent to which the Modern Slavery Act 2015 has been impacted by recent legislation (for example the Nationality and Borders Act 2022 and the Illegal Migration Act 2023).
• Whether the Act has kept up-to-date with developments in modern slavery and human trafficking, both within the UK and internationally.
• The efficacy of the provisions of the Act relating to supply chains.
• The efficacy of the other key provisions of the Act, including definitions, sanctions, reporting, enforcement, and the statutory defence for victims.
• The role of the Independent Anti-Slavery Commissioner, including whether the post is sufficiently resourced, and the process of appointment.
• Suggestions for improvements that could be made to the Act to help it to better achieve its aims.

The deadline for submissions is 27 March 2024.

(Parliament, Call for evidence launched into impact of Modern Slavery Act 2015, 28.02.2024)

(Call for evidence webpage)