Director's Remuneration Reports

The requirement for a directors' remuneration report is laid out in the Companies Act 2006 which in summary states the following:

  • S420: the directors of a quoted company must prepare a directors' remuneration report for each financial year of the company. If no such report is prepared then the directors may be guilty of an offence.
  • S422: the directors' remuneration report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.
  • S439: a quoted company must, prior to the accounts meeting, give to the members of the company entitled to be sent notice of the meeting notice of the intention to move at the meeting, as an ordinary resolution, a resolution approving the directors' remuneration report for the financial year.
  • S447: deals with the filing obligations of quoted companies of the directors' remuneration report with the Registrar of Companies.

The content of the directors' remuneration report is determined by Statutory Instrument 2008/410 Schedule 8 (Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008) and The Listing Rules (LR 9.8.6R(7) and 9.8.8R).

The directors' remuneration report is split into two parts, one part being subject to audit and an unaudited part. The audited part contains detailed information concerning all aspects of the directors' remuneration such as salaries, bonuses, compensation for loss of office, share option schemes and other long term incentive schemes and pensions. The unaudited part contains detailed narrative disclosures of remuneration policy and a graph of the total shareholder return in respect of the company's quoted equity shares compared with that of a broad equity market index.

Section 439 Companies Act 2006 requires the directors of a quoted company to put forward an ordinary resolution at a general meeting at which the annual accounts and reports are presented. The ordinary resolution is for the shareholders to approve the directors' report (there is no requirement in the Companies Act 2006 for the shareholders to vote on the annual accounts). This gives the shareholders an opportunity to express an opinion on the company's directors' remuneration policies and actual practice.

If the shareholders vote against the directors' remuneration report the effect is largely confined to negative publicity. The directors' remuneration report will still be valid as approved by the board of directors. The remuneration of any person as a result of the shareholders voting against the report would not be affected, although the company could contract with a director to make their remuneration conditional to some degree on the resolution.

Recently shareholders' opposition to the directors' remuneration report has affected the position of some chief executive officers. In May 2012 the CEO of Aviva stepped down from his office after 54 per cent of shareholders, excluding abstentions, opposed the directors' remuneration report at the company annual general meeting. Also in 2012 the CEOs of AstraZeneca Plc and Trinity Mirror Plc stepped down before the AGMs following opposition to the remuneration packages by shareholders.

Shareholder pressure is increasing and The Enterprise and Regulatory Reform Bill announced on 9 May 2012 in the Queen's speech will strengthen the framework for setting directors' pay by introducing binding votes by shareholders.

Boards will be reviewing their remuneration reports and may find it useful to spend time looking at the following two codes:

  1. The UK Stewardship Code
  2. The UK Corporate Governance Code

The Financial Reporting Council (FRC) published The UK Stewardship Code in July 2010 and the FRC is currently consulting on changes to the Code. The FRC sees the UK Stewardship Code as complementary to the UK Corporate Governance Code for listed companies and, like that Code, it should be applied on a ‘comply or explain’ basis. The Code is a list of seven principles that set out how asset managers and institutional shareholders should approach their work. Each of the principles, such as the need to monitor investee companies and to have a clear policy on voting and disclosure of voting activities, is supported by guidance notes.

The Financial Reporting Council (FRC) updated The UK Corporate Governance Code (formerly the Combined Code) in May 2010 and the FRC is currently consulting on changes to the Code. This Code sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.