FRC urges UK issuers to expand engagement on remuneration
This article was first published on Proxy Insight Online on November 30, 2021. For more information about the product, click here.
U.K.-listed companies must proactively and more frequently engage with shareholders regarding remuneration, according to the Financial Reporting Council’s (FRC) 2021 annual review of corporate governance, published November 25.
The FRC’s latest rendition of its annual corporate governance analysis examined the reporting of 100 FTSE 350 and FTSE Small Cap companies, finding that there is “still room for further improvement” relating to environmental, diversity, and remuneration disclosure.
It is more crucial than ever that remuneration committees seek input from shareholders when calculating executive compensation, the U.K. regulator said. While most companies confirmed that their remuneration arrangements support company strategy, “very few” explained how remuneration aligns with company purpose and value.
In particular, most companies that received upwards of 20% opposition against their compensation structures at previous annual meetings did not discuss actions or provide their rationale following further engagement.
So far this year, “say on pay” proposals among FTSE 350-listed companies have won an average of 93.3% support, compared to 93% and 94.1% support in 2019 and 2020, respectively, Proxy Insight Online data reveal.
Going forward, FRC recommends companies describe in detail actual engagement with shareholders by the remuneration committee, along with the impact said engagements had on both policies and outcomes.
Shareholder engagement should also be proactive and take place even if the remuneration policy was agreed in previous years.
While there has been an “improvement” in reporting among U.K.-listed companies on environmental and social issues, very few companies reported on areas where they underperformed or failed to meet ESG-related targets, the report revealed.
In particular, diversity and succession planning “continue to remain a concern,” with a frequent lack of cohesion between policies and succession plans.
Of the 100 companies assessed, 71 stated they had a board diversity policy or a diversity policy that extends to the board. A further 26 did not indicate that they had a policy in place, while three were unclear.
FRC also found that 70% of the sample group disclosed board diversity targets. However, like last year, these were predominantly related to gender and few related to racial and ethnic diversity.
Going forward, FRC expects companies to be clear about engagement with stakeholders, including any areas where the company failed to meet targets, and to explain diversity policies with objectives and targets, demonstrating their connection to company strategy.
The U.K. regulator was pleased to see that many companies are “preparing the ground” to ensure they will be compliant with upcoming requirements regarding Task Force for Climate-related Financial Disclosure (TCFD) reporting.
Of the 100 companies assessed, 36 already provided full TCFD reporting. A further 43 revealed that they plan to disclose next year, in line with FRC recommendations.
Many firms, however, appear “unwilling” to disclose targets and metrics outside of mandated greenhouse gas (GHG) emissions. FRC recommends firms aim to expand their climate reporting outside of these standards through the use of science-based targets, net-zero goals, renewable energy use, and water usage reduction.