The UK Corporate Governance regime is being strengthened with the proposed introduction at the start of 2019 of increased reporting requirements and corporate governance code changes. These changes will affect listed as well as large private companies. The intention is to improve the running of companies, protect the interests of shareholders and demonstrate engagement with employees, customers and suppliers. Kevin Lau, associate in the employment team, summarises the key changes and looks at which companies they will affect.
Following the closing of the UK Government's consultation on corporate governance reform in 2017, we are now starting to see the implementation of a number of proposals drawn up to improve the running of companies, including the introduction of new reporting arrangements to protect the interests of shareholders, and to demonstrate a company's engagement with employees, customers and suppliers.
The Companies (Miscellaneous Reporting) Regulations 2018 is currently passing through the approval process in Westminster and is anticipated to bring in a number of reporting changes from 1 January 2019. The new requirements will apply to financial years commencing on or after 1 January 2019.
What do the regulations do?
The regulations introduce a number of amendments into the Companies Act 2006 and related accounting regulations, which for the most part, will apply to all companies save those which are medium sized companies, or which are entitled to the small companies exemption (which we shall refer to as "relevant companies"). In practice, this will mean that large companies or listed companies will be those principally caught by the new provisions set out below.
First, all relevant companies must include a Section 172 statement setting out how the directors have had regard to the various matters set out in section 172(1) of the Companies Act 2006 ("duties to promote the success of the company"), which (among others) includes having regards to "the likely consequences of any decision in the long term; the interests of the company's employee; the need to foster the company's business relationships with suppliers, customers and others; and the need to act fairly as between members of the company." If the company is not quoted, the same information must be published on a free to access website.
Second, all companies with more than 250 employees in the UK, must include in their directors' report, a statement on employee engagement, which describes steps taken by the company to engage with staff, including any arrangements made to: provide employees with information that concerns them; consult with them for their views on decisions affecting them; encourage their involvement in, and raising awareness of financial factors affecting, the company's performance.
Third, all relevant companies must include a statement of engagement with customers and suppliers within the directors' report, detailing how directors have had regard to the need to foster relationships with suppliers, customers and others.
Fourth, any companies with 2,000 or more employees, or which have both a turnover of more than £200 million and a balance sheet total of over £2 billion (classed as "Very Large Companies"), will be required to supply a statement setting out the corporate governance arrangements of the company, including which corporate governance code they follow, and any departures from the code.
Finally, quoted companies with more than 250 employees will be required to publish within the directors’ remuneration report, their pay ratio information showing the CEO's total remuneration relative to the 25th, 50th and 75th percentile of full-time equivalent remuneration of the company's UK employees.
UK Corporate Governance Code
One further change beyond the introduction of the regulations is a proposed update to the UK Corporate Governance Code. The final version of the revised code is expected to be published on 16 July 2018 and to apply from 1 January 2019. Employment relevant changes include a provision that listed companies adopt one or more of the employee engagement methods set out therein; broader responsibilities for remuneration committees; and a five-year vesting period for any share-based remuneration.
For further information please contact Kevin Lau, associate or your usual contact in the Foot Anstey Employment Team.