Directors' remuneration disclosure changes

The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 applies to financial years ending on or after 30 September 2013

The changes have been brought about to make companies more accountable when setting directors’ remuneration and to increase transparency.

Companies will need to produce a policy for directors’ remuneration and seek shareholder approval by the end of the second financial period ending after 1 October 2013.

For example, a company with a 31 December 2013 financial year end will need to have shareholder approval for the remuneration policy by 1 January 2015.

Once this policy has been set, any remuneration must be in line with this policy, with any deviation requiring further shareholder approval.

Companies must produce a remuneration policy that explains how directors are to be remunerated, including all forms of remuneration, any loss of office and payments to any past directors with reference to the long-term strategic performance of the company.

This policy will be binding by a shareholder vote and reviewed and submitted for shareholder approval at least every three years. Any subsequent changes will have to be voted on during the company’s general meeting.

If the changes are not approved by the shareholders, either remuneration must be paid in line with the existing policy or a special resolutions meeting will need to be sought.

When the shareholders vote on the policy, only an ordinary resolution will be required, which would mean only a majority will be required to pass the policy. There will be an annual report setting out details of what was actually paid to directors in the last financial year.

Any breach of policy can result in action being taken by the directors of the company on behalf of the shareholders. If this does not satisfy the shareholders, they will be able to go to court to resolve the issue and the directors could be directly liable for any loss incurred by the company.

This direct action against a director will be limited to cases where they had authorised a payment that breached the policy; decisions will be made on a case-by-case basis.

There will be an annual statement from the chairman of the remuneration committee providing details on any decisions made and any substantial changes on directors’ remuneration, together with the reasons for those decisions or changes.

The aim is to show that the remuneration policy is congruent with the long-term strategy and performance of the company.

An exposure draft produced by the Financial Reporting Council should be reviewed by all companies, with Appendix III providing Companies Act references to the directors report requirements.

However, the bulk of the guidance and the strategic report element relates to quoted, other public, large and medium-sized companies that are required under the Companies Act to comply with strategic report disclosure requirements; Appendix II provides a useful reminder of these statutory obligations. 

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