Vince Cable announces plans for investors to have greater clarity on how top businesses are run and how executive pay is matched to performance.
The Department has today published two documents aimed at improving the corporate governance framework in the UK.
The narrative reporting consultation proposes to simplify the reporting requirements for companies, providing clear and relevant information to investors on performance and pay. It will increase transparency and accountability in the investment chain and enable shareholders to get a real picture of what is happening to inform their investment decisions and help our economy grow.
Also published today is a discussion paper on executive remuneration, focusing on how to curb pay asymmetry - where escalating pay at the top does not correlate with company performance.
The consultation on ‘The Future of Narrative Reporting’ will last for 10 weeks and closes on 25 November. It follows on from the call for evidence ‘A long-term focus for corporate Britain’ launched in October 2010, a comprehensive review of corporate governance and economic short-termism in the UK.
Measures are proposed to improve reporting on remuneration that include requiring companies to provide information on the link between the performance of companies and top executives earnings. For example, requiring disclosure where the remuneration committee has agreed to pay bonuses when performance targets have not been met.
It also asks:
- Whether to require the total figure for each board director’s remuneration to be published, including basic salary, bonuses, share schemes and pensions and how this should be calculated.
- If the ratio between the CEO’s pay and median earnings in a company should be published.
- In line with proposals for large banks, whether to disclose the highest earners in a company below board level, for example those earning above a defined threshold of total pay, or a defined number of top earners who have significant influence over how a company is run or those who have the ability to take significant risk.
The consultation sets out Government plans to divide companies’ narrative reports into two documents so that it is easier for companies to prepare investors to identify the information they need:
- A Strategic Report, aimed at shareholders providing information on financial results, information on the business model, strategy, risks, remuneration and key environmental and social issues.
- An Annual Directors’ Statement, published online, which will provide the detailed information that underpins the Strategic Report.
Building on Lord Davies report on Women on Boards the consultation also considers whether companies should be required to publish the number of women who sit on their boards and executive committees.
Business Secretary Vince Cable said:
“The average length of an annual report is now almost 100 pages and even longer for FTSE 100 companies. It has become unwieldy, complex and hard to understand, so investors cannot easily find the information they need.
“Changing the way companies do their annual reports will provide investors with better information on how well businesses are performing and what their directors are being paid, increase transparency and reduce the burden on business freeing them up to concentrate on growing and focusing on the long-term.”
The discussion paper on executive remuneration looks at how to curb pay asymmetry - where escalating pay at the top does not correlate with company performance.
It is a result of conversations Government has had with shareholders, investors and business leaders on pay and sets out their thoughts. These include:
- Whether there is a case for a binding vote for shareholders on deciding pay.
- Diversifying the membership of remuneration committees to encourage greater challenge, such as having employee representation.
- How to simplify and improve the structure of remuneration to incentivise and reward sustainable long-term performance.
- Improved research and guidance on remuneration to help companies and shareholders make more informed decisions on pay.
On executive pay, Dr. Cable said:
“The Government wants the UK to be a magnet for attracting and retaining the best talent, and we do not want to do anything to jeopardise this aim.
“Executive remuneration that is well structured, linked to the objectives of the company and rewards directors who contribute to the long-term success of the company is an important way of promoting sustainability and growth.
“However, there are concerns about the disconnect between how our largest listed companies perform and the rewards that are on offer. This is not sustainable.
“Concern over this is not just coming from Government. Investors, business groups and captains of industry have all told us that this is real problem and needs to be addressed.
“We have put a wide range of options up for discussion so we can decide what is workable and end up in a place where remuneration is genuinely matched to performance and long term success.”
The deadline for all relevant parties to contribute their views on the discussion paper is 25 November 2011
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- The Kay Review of UK Equity Markets and Long-Term Decision Making - closes 18 Nov 2011