Pending changes to Directors’ Remuneration Report Regulations

On 3 March the European Commission issued new guidelines on the standard presentation of the remuneration report under Directive 2007/36/EC. This was to comply with a mandate presented in Article 9(b)6 of the 2017 revisions to the second Shareholder Rights Directive (SRD II)[1]. The guidelines are non-binding and the UK Government has to decide how far it will translate the new guidelines into revised regulations by the deadline of 19 June.

Context

The original Shareholder Right Directive was issued in 2007 and was concerned with strengthening corporate governance and particularly the rights of shareholders in relation to voting at general meetings. It applied to companies which have their registered office in a member state trading on a regulated market situated in a Member State.  This definition includes Main Board listed companies on the London Stock Exchange but not AIM companies, which fall into the category of “exchange-regulated’ rather than EC regulated.

In 2017, the EC issued revisions and extensions to the Directive, aimed at strengthening the first Directive and encouraging institutional investors and asset managers to take a longer-term view of the market. One new set of articles focused on directors’ remuneration:

• Article 9a covered the requirement of companies to prepare a remuneration policy and to submit it for a (binding or non-binding) shareholder vote in general meeting on inception and whenever a material change is made and, in any case, at least every four years. The Article covered the information to be provided in the policy, which is very close in content to that required for UK companies under Schedule 8 (the 2013 Directors’ Remuneration Reporting Regulations, DRRR) as amended by the Companies (Miscellaneous Reporting) Regulations 2018, and the associated voting requirements of the Companies Act.

• Article 9b covered the information to be provided in the remuneration report (ie the implementation report for the previous year) and the requirements to submit it to a shareholder vote. Again, the requirements are very similar to the UK regulations.  However, 9b(6) mandates the Commission to adopt guidelines to specify the standard presentation of the information laid down. These are contained in the communication from the Commission on 3 March labelled “Guidelines on the standard presentation the remuneration report under Directive 2007/36/EC”.  The aim of the Commission is to achieve a standard format across Europe.  Unfortunately, the requirement is more detailed than the DRRR, especially in relation to individual directors’ performance over time and their pay movements compared to average employee remuneration.

Fortunately for UK companies, it looks as if the Government does not intend to adopt the detail of these guidelines.   We spoke to BEIS who told us that they are proposing to put a new statutory instrument (SI) in front of Parliament in the next few weeks. It will be accompanied by a table comparing what is already in place in the DRRR with what needs to be implemented under SRD II Article 9. The regulations will be mandatory, but they do not intend to require companies to adopt the full EC guidelines.

If the new SI is approved by both houses, it will enter into force on 10 June, which is the transposition date for SRD II. However, it will contain various transitional provisions for companies and it will not need to be adopted by companies for reporting until 2020.

BEIS will be publishing FAQs on the new regulations and the GC100 Investor Group will be updating their own Guidance. BEIS are thinking of appending the final EC guidelines for information, allowing companies, if they choose, to adopt some of the new guideline provisions, if they appear useful.  We got the impression that all this will go ahead whatever the Brexit outcome.

For further information, contact Damien Knight

[1] Directive EU 2017/828 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.

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