Need to keep talent not enough to justify big pay, says watchdog

By Harriet Agnew. This article originally appeared on the Financial Times website, FT.com on September 17th, 2014

Companies will no longer be able to use retaining talent as a justification for paying big remuneration packages, the UK accountancy watchdog confirmed on Wednesday, amid increasing pressure for more pay discipline in the boardroom.

The Financial Reporting Council has published an updated version of the UK corporate governance code which confirms several proposals that the watchdog made in April.

The new document removes the line stating that remuneration should be enough to “attract, retain and motivate directors of the quality required”. Instead, boards of listed companies should ensure that “executive remuneration is aligned to the long-term success of the company and demonstrate this more clearly to shareholders,” the updated code says.

Jo Iwasaki, head of corporate governance at the ICAEW, the UK accountancy body, said the change in wording was “symbolic”: “It is a clear indication that the FRC wants a clearer association between directors’ payout and the company’s long-term future.”

Shareholders are increasingly taking a tougher stance on remuneration and this year have voted down executive pay packages at companies including Burberry.

Stephen Haddrill, chief executive of the FRC, said the previous focus on retention “tended to promote pay escalation and leap frogging”, rather than long-term interests. As expected, the new code said that companies should put in place structures to allow them to recover, withhold and defer remuneration.

The FRC has also confirmed proposals for boards to include a “viability statement” in the strategic report to investors, following proposals from Lord Sharman to improve director accountability.

Companies will now publish a basic going concern statement and a new, longer-term viability statement about the risks to the company and what companies are doing to mitigate these risks.

Companies will be allowed to choose the period over which they look forward but the report says it must be more than a year and reflect the nature of their business.

This comes after a group of influential investors, wrote to the Financial Times in July arguing that proposed changes to the corporate governance code would weaken the assurances a company’s directors must currently give shareholders about its viability.

Robert Hodgkinson, ICAEW executive director said that the going concern change presents two big challenges for boards to ensure they’re compliant: working out “what they need to change in their risk management and reporting to satisfy the new guidance” and deciding “over what period they consider their company to be viable so they can be ready to issue their new viability statement”.

The FRC’s code operates on a “comply or explain” basis. The revised code will apply to accounting periods beginning on or after October 1 2014.

This article has been amended since original publication to reflect the fact that FirstGroup shareholders did not vote down its executive pay package this year.

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