Proposed revisions to the UK corporate governance code

Comments from ACCA to the Financial Reporting Council
27 June 2014


Question 1: Do you agree with the proposed changes in Section D of the Code?

We are pleased that the FRC is proposing to change the current main principle D.1 – “Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance”

We draw the FRC’s attention to evidence from an academic study in 2013 by Cooper et al[1] that found that CEO pay in US listed companies is negatively related to future stock returns. Firms that paid their CEOs in the top ten percent of excess pay earned negative abnormal returns over the next three years of approximately 8%. The effect was stronger for CEOs who received higher incentive pay relative to their peers.

The current wording could imply that remuneration is the main motivator of director behaviour. ACCA is in the final stages of a 9 month ESRC co-funded study of corporate culture and behaviour. One finding is that motivation has an important influence on behaviour yet research suggests that monetary reward, far from being the main motivator of behaviour, is a rather poor one and that intrinsic motivators such as recognition are more effective.

If performance is to be based on meeting measures or targets, they should include a balance of personal and corporate measures and take into account the benefits to the company of promoting good ethical behaviour.  

We consider the proposed new wording “Executive directors’ remuneration should be designed to promote the long-term success of the company. Performance-related elements should be stretching and rigorously applied.” To be an improvement but, in the absence of anything in the Code to the contrary, monetary reward could wrongly still be seen as ‘the’ (only or most important) way to motivate director behaviour. The supporting principle could be amended to clarify that remuneration is but one means to motivate directors.


Question 2: Do you agree with the proposed changes relating to clawback arrangements?

Yes. We support the intention to ensure that remuneration schemes should enable the company to claw back or recover remuneration payments where director behaviour justifies it. However, putting this into practice and actually making a recovery could prove challenging.


Question 3: Do you agree with the proposed change relating to AGM results? Is the intention of the proposed wording sufficiently clear?

The proposed wording “When, in the opinion of the board, a significant proportion of shareholders have voted against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result” could be made more precise. It leaves the board to decide what is a significant proportion of shareholders and what action it takes to understand the reasons behind the vote result. A company could comply with this simply by saying the board intends to take action to understand the reasons behind the vote result; which would not be helpful. Asking the board to explain what action it intends, if any, to take having taken action to understand the result, and why, would be more helpful.  We therefore suggest setting a threshold for dissident votes of say 20% and requiring the board to make a statement within 28 days about its reaction to the vote and to declare what steps, if any, it intends to take to address shareholders’ concerns


Question 4: Do you agree with the proposed amendments to the Schedule?

Two of the problems with executive pay (rather than director pay) are the complexity and lack of transparency of remuneration arrangements. Schedule A seems to accept this could compound it. We would prefer Schedule A to encourage simpler and more transparent pay structures. 


Question 5: Do you agree with the changes to the Code relating to principal risks and monitoring the risk management system?

No. The FRC should do more to encourage companies to approach risk management in a way which is thinking rather than mechanistic. Further, the board should primarily be concerned with ensuring strategic direction and understanding the risks associated with that direction as well as any other risks which could jeopardise the viability of the company. Above all they need to assure themselves that executives will not bet the company without the board’s knowledge or agreement.

The Code should encourage boards to think about what sort of risk should concern them, eg to be concerned with the risk of the severe outcomes following a fire rather than the risk of a fire. There is a mismatch between the proposed principle and provision C2.1. The former refers to strategic objectives and the provision lists the various outcomes of risks. We suggest that the principle refer to strategic ‘outcomes’ rather than ‘objectives’.  The Code should also do more to encourage companies to ensure that risk management is embedded into management rather than being a separate activity.


Question 6: Do you agree that companies should make two separate statements? If so, does the proposed wording make the distinction between the two statements sufficiently clear?



Question 7: Do you agree with the way proposed Provision C.2.2 addresses the issues of the basis of the assessment, the time period it covers and the degree of certainty attached?

It depends on what is meant by ‘reasonable expectation’ (that the company will be able to continue in operation and meet its liabilities). In the absence of a clear articulation on this, boards will have little trouble claiming compliance. The future is unknowable but can be predicted. A catastrophic event could happen tomorrow, in sixth months or never. Many people claimed that the financial crisis could not have been foreseen, some people did however foresee major problems and with hindsight there were many warnings. The boards of several of the banks which failed or required rescue arguably should at the end of 2008 (and quite possibly in 2007) have had serious concerns about whether they could continue and meet their liabilities. It is inconceivable, however, that any bank board would have reported it had any doubts about their bank’s ability to continue. In practice, boards will almost always find a way interpret circumstances in such a way as to consider it ‘does’ have a reasonable expectation of the company continuing.  

Rather than require companies to make such a statement, it would be better to require disclosure of both the risks that threaten viability and the board’s assessment of those risks. Investors, and others, can then form their own view about the board’s assessment.


Question 8: Do you have any comments on the draft guidance in Appendix B on the going concern basis of accounting and / or the viability statement?

Please refer to answer to Question 7.





[1] Cooper. M J, G. H. (2013). Performance for pay? The relation between CEO incentive compensation and future stock price performance. Social Science Research Network