Ashurst Governance & Compliance Update – Issue 57

Executive Remuneration

1.  Investment Association publishes revised Principles of Remuneration

The updated Investment Association Principles of Remuneration have been published, responding to concerns that the previous Principles and guidance was too prescriptive, making it difficult for companies with a global presence to attract top executives, particularly from the US.

The revised guidance reiterates that the Principles are not a set of rules but an approach to remuneration practices commonly accepted as appropriate for the majority of companies. Where a company follows a more bespoke approach to remuneration, a comprehensive explanation should be given to shareholders of that approach. Shareholder consultation on material strategic remuneration decisions remains at the core of the Principles and the accompanying guidance (and not as a means to seek approval or endorsement but to take into account the views of shareholders when designing and implementing remuneration policy).

The guidance has been rewritten to support more flexibly three overarching principles for setting remuneration policies:

• promote long-term value creation through alignment of pay with corporate strategy;
• support individual and corporate performance, encouraging the sustainable long-term financial health of the business and sound risk management; and
• seek to deliver remuneration levels clearly linked to company performance.

Notable changes to the guidance for remuneration committees are set out below.

Remuneration committees

Remuneration committees should understand company strategy and build effective relationships with senior management and shareholders. They should also engage proactively and constructively with shareholders and other material stakeholders to take into account their views and expectations (not just engage with shareholders if there is a significant vote against a remuneration resolution).

Levels of remuneration

The emphasis in the guidance is on providing levels of remuneration appropriate for the company's circumstances taking into account the need to attract and retain talent and meet corporate objectives. Benchmarking as the only justification for increases in remuneration is still not considered appropriate as it can lead to a ratchet effect in the market.

Annual bonuses

Deferrals of a portion of bonus into shares is still encouraged but if an executive director has met the shareholding guideline, shareholders may support a reduction in the level of deferral provided that adequate malus and clawback provisions apply.

Hybrid schemes

Hybrid schemes are long-term incentive arrangements that typically combine performance awards and restricted shares which are subject only to service. The guidance now acknowledges that hybrid schemes may be appropriate, recognising that these are common for companies with a significant US presence or which compete for global talent. The restricted share portion of any such award should be discounted to reflect the lower risk and the vesting period is expected to be five years, with no accelerated vesting or early release unless there is a clear explanation of any different approach.

Dilution limits

The dilution limit of five per cent of issued share capital that may be used for discretionary share plans in any rolling 10 year period has been removed from the guidance. The 10 per cent dilution limit over the same rolling period is retained but there is also an acknowledgement that in exceptional cases that limit may be increased with shareholder approval, for example, for a high growth company that has recently listed and needs more shares to incentivise key employees.

Retention awards and transaction bonuses

The specific warnings against the use of retention awards and transaction bonuses has been removed from the guidance but the guidance encourages remuneration committees to engage with shareholders on proposals to make any special awards and to justify them. In the context of a takeover, such awards are nonetheless unlikely to be common because of UK Takeover Code requirements.

Change of control

The whole section on treatment of share awards on change of control has been removed from the guidance. In particular, this means that the previous guidance that early vesting of awards on change of control should be time pro-rated has been removed.

Employment Reforms

2.  Employment Rights Bill published 

The Employment Rights Bill has been published. Although the devil will be in the detail over the coming months with consultation documents to follow, the Bill represents the most radical overhaul of employment rights in decades. There will be a lot for employers to get to grips with in terms of their HR policies and processes. 

This article from our Employment Team sets out the details of the Bill's key provisions and the potential impact for employers. 

3. EHRC publishes guidance on sexual harassment and harassment at work 

The Equality and Human Rights Commission (EHRC) has published its updated guidance on sexual harassment and harassment at work. The updated guidance specifically addresses the new duty on employers to take reasonable steps to prevent sexual harassment in the workplace which comes into force on 26 October 2024.

If employers fail to comply with the new duty, the EHRC can take enforcement action. In addition, compensation in a successful harassment claim may be increased by up to 25 per cent.

The updated guidance includes a number of practical examples and suggestions which the EHRC considers employers should take in order to comply with the new preventative duty, specifically the need to undertake a risk assessment and produce 'action plans' accordingly. 

The EHRC has also published a 8-step guide for employers listing practical steps which employers could take to prevent and deal with sexual harassment in the workplace.

This article from our Employment Team sets out further detail.

Payment Practices Reporting

4. Revised Payment Practices Regulations published with implementation delayed

The government has published a revised draft of the The Reporting on Payment Practices and Performance (Amendment) (No 2) Regulations 2024 which has been laid before Parliament. The accompanying explanatory memorandum provides useful context and guidance. The Regulations are stated to come into force on 1 March 2025 and apply in respect of financial years beginning on or after 1 April 2025, as opposed to 1 January 2025 indicated in the previous draft. 

The regulations will amend the Reporting on Payment Practices and Performance Regulations 2017 (SI 2017/395) and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017(SI 2017/425) to require qualifying companies and LLPs to publish information about their payment practices and policies in relation to retention clauses in any construction contracts that they have with suppliers.

For a reminder of further measures in this area recently announced by the government, see AGC Update, Issue 56 – Item 7.

Narrative Financial Reporting

5. Non-financial reporting review: simpler corporate reporting for medium-sized companies

As part of the de-regulatory agenda initiated by the previous administration (see AGC Update, Issue 51 – Item 4), the Department of Business and Trade has published its response to a consultation it launched in May 2024. 

The consultation sought views on raising the employee threshold for medium-sized companies from not more than 250 employees to 500 employees and exempting eligible medium-sized companies from having to produce a Strategic Report.

Whilst most respondents supported the proposals, the DBT does not propose to take them forward at this stage. Rather, they will be considered as part of the government’s broader non-financial reporting review (see AGC Update, Issue 53 – Item 2) which closed towards the end of June 2024. Nevertheless, the government's commitment to change in this area is underlined in its recent publication: Invest 2035 – The UK's Modern Industrial Strategy – see 'Regulation' on page 40. In addition, the relevant Minister's Statement on the Strategy indicates that relevant legislation in this regard, including to remove 'redundant reporting requirements' will be published by the end of the year. The Statement also confirms that a further 'ambitious' consultation aimed at simplifying and modernising the UK's non-financial reporting framework will be launched in 2025 which will also include examining the potential for updating shareholder communication in line with technology.

Economic Crime and Corporate Transparency

6. Companies House publishes transition plan in relation to ECCTA

Companies House has published an outline transition plan for reforming the role of Companies House in connection with the Economic Crime and Corporate Transparency Act 2023.

The plan sets out a reminder of the objectives of the reforms, the progress made since March 2024 on ECCTA implementation and an intended timetable for the remainder of reforms. Companies House expects that around 50 statutory instruments will be commenced over the next 18 months depending on available Parliamentary time, with implementation activity and transitional periods continuing until 2027. Successful completion of the significant ongoing work programme to develop new systems and processes at Companies House will be funded by increased Companies House fees.

Briefly, the plan indicates that Companies House should be able to:

By Winter 2024 into 2025:

• expedite the striking off of companies where the Registrar has concluded the company has been formed for a false basis; and
• annotate the register in a wider range of circumstances, such as when a company has a director who has been disqualified but has yet to terminate their appointment on the register, or where Companies House has issued a statutory notice to require more information from a person, but the matter remains unresolved.

By Spring 2025:

• carry out checks on authorised corporate service providers (ACSPs) to authorise them to carry out identity verification services;
• allow individuals to voluntarily verify their identity; and
• receive and assess applications from individuals seeking to have residential addresses suppressed from public disclosure in certain circumstances.

By Autumn 2025: 

• make identity verification compulsory on incorporation and on the appointment of new directors and new PSCs; and
• begin a 12-month transition period to require such verification for existing directors and PSCs.

By Spring 2026:  

• require identity verification for presenters filing any document;
• require third-party agents filing on behalf of a company to be registered as an ACSP; and
• reject documents delivered by a disqualified director on their own behalf.

By the end of 2026:  

• require all limited partnerships to submit more information;
• complete the transition period for the identity verification of all individuals; and
• commence compliance activity against those who have filed to do so.

The transition plan also sets out the intended powers that Companies House will have following accounts reform and the requirements following the implementation of restrictions on corporate directors.

Sustainability reporting and Assurance

7. Commission takes enforcement action against Member States on CSRD

The European Commission has commenced infringement procedures against 17 Member States that have not yet transposed the Corporate Sustainability Reporting Directive ((EU) 2022/2464) (CSRD) into national law. The deadline for member states to transpose the Directive was 6 July 2024. 

The relevant member states are: Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland. The Commission has sent letters of formal notice to the relevant Member States who have two months to respond and to complete their transposition. In the absence of such action, the Commission may decide to issue a reasoned opinion and if the matter cannot be resolved with the relevant Member States, may refer the matter to the European Court of Justice.

The first annual sustainability reports by in-scope companies are due to be published in 2025 in respect of financial years beginning on or after 1 January 2024. If the 17 Member States do not introduce implementing legislation, the CSRD's sustainability reporting requirements will not apply consistently across the EU.

8. FRC publishes emerging findings from market study of sustainability reporting assurance

The Financial Reporting Council has published its initial feedback from its March 2024 market study into sustainability reporting assurance, which explores how the market for sustainability assurance is functioning and developing in the UK.

The key findings to date include:

• Most UK companies report that they currently have a sufficient choice of assurance providers, with over 64 assurance providers providing sustainability assurance to FTSE 350 companies in 2022. The market trends highlighted in the report showed that the proportion of FTSE 350 companies that obtained sustainability assurance increased by 19 per cent between 2019 and 2022. Many stakeholders raised concerns about whether there is sufficient supply to meet future demand for sustainability assurance in the UK.
• Many stakeholders also reported a growing preference for companies to use their auditor for sustainability assurance; this may be driven by international changes (such as CSRD requirements) affecting some UK companies. Some companies raised concerns that the market may start to consolidate around the largest UK audit firms thereby reducing choice and effective competition in the future. The report highlights that the Big Four audit firms supplied 35 per cent of FTSE 350 sustainability assurance engagements in 2022.
• Some companies have flagged issues regarding the consistency in the quality of sustainability assurance services which meant, in reality, the choice of providers was limited. Many stakeholders suggested that a regulatory framework could help to ensure high-quality sustainability information although they had different views on the form it should take. Aside from the impact of CSRD, developments in other jurisdictions, such as Japan, Bangladesh, Brazil, Australia, New Zealand and California might also have an impact on UK companies. Stakeholders reported significant variance between assurance requirements in different jurisdictions such as those relating to the ability of non-audit firms to provide sustainability assurance and the need to obtain reasonable assurance.
• The report highlights that International Standard on Assurance Engagements (ISAE) 3000 is used by over half of FTSE 350 companies obtaining sustainability assurance, representing a 5 per cent increase between 2019 and 2022. Other standards used include ISAE 3410 and ISO 14064.
• Many stakeholders, including most companies, reported there are significant costs associated with obtaining assurance (both fees and costs associated with developing the company systems, processes and controls underpinning disclosures). Anecdotally, the price of assurance can vary significantly, from 5 per cent to 30 per cent of the statutory audit fee. The report notes that companies are increasingly using a formal tender process to select an assurance provider.

The FRC is inviting stakeholders to provide further input into the study by responding to the questions in its feedback report (see page 20) by 29 November 2024.

Corporate Re-domiciliation

9. UK Independent Expert Panel publishes report

In December 2023, an independent expert panel was established to provide advice to the UK government on how best to establish a UK corporate re-domiciliation regime. It has now published its report and recommendations. 

By way of reminder:

• Re-domiciliation allows a company incorporated in one jurisdiction to become a company incorporated in another jurisdiction whilst retaining its legal personality.
• A public consultation was undertaken on the principles of a corporate re-domiciliation regime in October 2021, with a summary of responses published in April 2022.
• The independent expert panel was established to develop a specific proposal for changing the legal framework to enable re-domiciliation.

The panel's report contains the following findings and recommendations:

• The panel strongly supports the introduction of a two-way re-domiciliation regime to allow non-UK registered corporate bodies to become UK companies, and UK companies to re-domicile overseas. It believes that doing so will increase the attractiveness of the UK as a destination of business choice. Versions of such regimes already exist in many other jurisdictions.
• The report suggests how various components of the regime could work, including setting out which organisations would be eligible to re-domicile, the information they would have to provide to do so, the process for dealing with the application and how this would interact with requirements in another jurisdiction.
• The report recommends making UK re-domiciliation available to solvent bodies corporate that intend to carry on business as a going concern in the UK after re-domiciliation. Further, as long as the applicant meets the requirements of its home jurisdiction and the relevant inward re-domiciliation requirements of the UK regime, it should have flexibility to re-domicile as either a private or public UK company.
• The report suggests how re-domiciliation to the UK could work, including the information requirements, application and determination process and the approach to determining the effective date of the re-domiciliation. As far as possible, the panel has based its proposals on the same principles applicable to company incorporation in the UK so as to ensure there is comparable information available to the public and that the re-domiciling entity meets substantially the same requirements as a company originally incorporated in the UK.
• The report sets out how a regime for outward re-domiciliation by UK companies could work and how the interests of members, creditors and matters relating to national security could be protected.
• The report considers how a re-domiciled company would be treated once it has re-domiciled to the UK for company law purposes, and also how legislation relating to matters such as tax, accounting and insolvency could be altered. It also makes recommendations for changes to the powers and responsibilities of the Registrar of Companies.
• Finally, the report recommends that the government undertakes further consultation once it has decided on more detailed proposals. This would allow those with more specialist knowledge of particular areas to comment on proposals and help ensure the regime will work well in practice. It should also obtain input from other regulators (including the Takeover Panel, the Financial Conduct Authority, and the Prudential Regulation Authority) on any necessary changes to accommodate both a company re-domiciling in the UK and a UK company re-domiciling overseas. Further consultation will also be necessary on accounting and audit related aspects of re-domiciliation, which are particularly complex.

The government has welcomed the panel’s report and intends to consult in due course on a proposed regime design.

Authors: Will Chalk, Partner; Rob Hanley, Partner; Crowley Woodford, Partner; Ruth Buchanan, Partner; John Papadakis, Counsel; Marianna Kennedy, Senior Associate, Vanessa Marrison, Expertise Counsel; Becky Clissman, Counsel.