UK puts in place new ‘malus’ pay clawback scheme in updated governance code

The UK Financial Reporting Council (FRC) has today (September 17) issued an updated version of the UK Corporate Governance Code that includes a new requirement for companies to tailor executive pay to long-term company performance and introduce ‘malus’ schemes – the opposite of bonuses – where cash can be clawed back in the event of poor results. It follows engagement on the issue by investor trade body, the National Association of Pension Funds (NAPF), and investors Hermes, Universities Superannuation Scheme and Railpen.

In June, the investors supported the FRC’s proposals around remuneration and long-term company performance and ‘malus’ schemes, and today the FRC has announced they will be part of its updated governance code.

The revised code, which will apply to accounting periods beginning on or after 1 October 2014, has a number of changes which the FRC says will enhance the quality of information investors receive about the long-term health and strategy of listed companies.

The code will now require companies to include a ‘viability statement’ in its strategic report to investors. It is expected that this statement will look forward significantly longer than 12 months.Requirements for companies include robustly assessing risks and explaining how they are being managed or mitigated; stating whether they will be able to continue in operation and meet their liabilities; and monitoring their risk management and internal control systems annually.

The code also makes a number of new requirements around remuneration, such as a greater emphasis on ensuring that remuneration committees make policies which are designed with the long-term success of the company in mind and that companies put in place arrangements enabling them to recover or withhold pay when appropriate to do so.

The updated code also requires companies to explain how they intend to engage with shareholders when a significant percentage of them have voted against any resolutions.

Looking forward to more updates to the code, the FRC has indicated it is considering looking at culture and values of a company and gender and race diversity on boards for its next update to the code in 2016.

FRC Chief Executive Stephen Haddrill said: “The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation.”