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Acting in the best interest of the company?

13 Aug 18

New reporting rules for larger companies regarding directors' actions and remuneration will require information to be collected from the new year onwards

by Gary Gray

On 17 July 2018, regulations were made setting out new disclosure requirements affecting large companies, identifying disclosures to be included in the strategic report and directors’ report of companies caught by the regulations.

Promoting the success of the company

The regulations, the Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) will require companies to publish a report on how the directors have had regard to matters in s 172 of the Companies Act 2006.

Section 172 provides a requirement that a director “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”. For accounting periods beginning from 1 January 2019, large companies (those with more than 250 employees, or turnover in excess of £22.8 million if the number of employees is less than 250) will need to include information in their strategic report covering:

  • the issues, factors and stakeholders the directors consider relevant in complying with s 172, 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.

Reporting under these new regulations will begin in 2020 covering activities undertaken, and information collected, in 2019.

Employee engagement

Companies will be required to include in the directors’ report a statement summarising:

  • how the directors have engaged with employees;
  • how they have had regard to employee interest; and
  • the effect of that regard, including on the principal decisions taken by the company during the financial year.

The regulations do provide for such information being included in the strategic report, where directors consider that information to be of strategic importance.

To ensure clarity of reporting, the new statement is required to be provided as a separately identifiable statement within the strategic report, and companies will be required to publish the statement on a website maintained by or on behalf of the company.

Whilst such disclosure will not be new for quoted companies, unquoted companies who meet the test for including the relevant statements in their strategic report will now have to comply with the additional publishing requirements. In situations where unquoted companies choose to publish just the relevant statement, any cross referencing to other parts of the strategic report/annual report will need to be included with the statement for completeness.

Corporate governance code

Companies who fall within the scope of the regulations will also be required to include a statement in their directors’ report stating which corporate governance code, if any, has been applied by the company and the way that application has taken place. If the company has departed from any aspect of that code, it must disclose the aspects of the code from which it has done so, and provide the reasons for doing so. Similarly, such a report must be published on a website maintained by or on behalf of the company.

The regulations extend to subsidiary companies provided such subsidiary is caught by the thresholds requiring it to publish the relevant data. A parent entity must satisfy the relevant disclosures even if it is only caught by the regulations by virtue of consolidation.

CEO remuneration

Quoted companies who have more than 250 employees will be required to prepare, in accordance with the regulations, a table within the annual directors’ remuneration report showing the ratio of their CEO’s latest single total figure of remuneration (STFR) to:

  • the median full time equivalent (FTE) remuneration of the company’s UK employees;
  • the 25th percentile FTE remuneration of the company’s UK employees; and
  • the 75th percentile FTE remuneration of the company’s UK employees,

along with supporting information and an explanation of the data provided, including the methodology chosen for calculating the ratios, the reason for any change in the ratios from the previous financial year, and whether the ratio is consistent with the company’s wider policies on employee pay, reward and progression.

Executive pay – share price

Companies that prepare directors’ remuneration reports are required to provide an illustration of the possible impact of share price growth on executive remuneration outcomes that are linked to performance periods or other executive incentive periods of more than one financial year.

A transparent future?

In this era of “transparency max”, these new reporting requirements will provide further disclosure on the actions of directors in the way they manage the businesses they represent, as well as demonstrating how effective their engagement is with employees and suppliers to contribute to the overall success of the business. Alongside the disclosure of people with significant control, these new reporting requirements will give a greater degree of transparency surrounding the control and decision making processes, enhancing the information available to those interacting with large companies in the UK.

Gary Gray is head of Company Secretarial Services with Burness Paull LLP

 

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