Draft Companies (Directors’ Remuneration Policy and Directors' Remuneration Report) Regulations 2019

Tanmanjeet Singh Dhesi Excerpts

Wednesday 15th May 2019 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

I beg to move,

That the Committee has considered the draft Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019.

It is a pleasure to serve under your chairmanship, Ms McDonagh. The draft regulations will add certain new requirements to the reporting of directors’ remuneration by publicly quoted and traded companies. They will give shareholders more information to assess how the rewards to directors match performance, for example by requiring companies to provide more detail about the award of company shares to directors.

The new requirements are contained in new European directive 2017/828, which is more commonly known as the revised shareholder rights directive and is due to be transposed into UK law by 10 June 2019. The draft regulations will implement articles 9a and 9b of the directive, which cover the reporting of directors’ remuneration, to the extent that they do not already have effect in UK law. Other parts of the directive are being implemented by Her Majesty’s Treasury, the Financial Conduct Authority and the Department for Work and Pensions. For example, the FCA and the DWP are implementing new obligations for asset managers and pension funds to report on how they engage with the companies in which they invest on behalf of their clients.

The draft regulations will add a small number of requirements to the directors’ remuneration policy and the directors’ remuneration report that publicly quoted companies are already required to produce under the Companies Act 2006.

The main change to the directors’ remuneration policy is that companies will be required to provide additional detail about the arrangements under which directors can eventually exercise their shares. The Government believe that that will be a valuable addition to the existing framework for executive pay reporting. The award of company shares to directors is of great interest to shareholders because it has the potential to better align the interests of directors with the long-term success of the company. The draft regulations also provide for the remuneration policy to set out more information on directors’ service contracts and highlight key changes introduced since the previous policy.

[Mr Tanmanjeet Singh Dhesi (Slough) (Lab)]

How will the draft regulations affect the deplorable and widening gap between the highest and lowest paid within companies, or the unsatisfactory gender pay gap? What are the Government doing to tackle those issues?

[Kelly Tolhurst]

As I had started to outline, the draft regulations, which implement the shareholder rights directive, will require more information to be included in remuneration reports so that shareholders have more information when they vote and make decisions on policy. As hon. Members know, we implemented ratio reporting last year, the whole idea of which is to give shareholders more transparency on what executive directors are earning in comparison with the rest of the organisation’s employees, so that they have more information to exercise their votes.

[Mr Dhesi]

And the gender pay gap?

[Kelly Tolhurst]

That is a wider conversation. The draft regulations relate to remuneration reports, whereas the gender pay gap is part of a wider discussion.

I will make some progress on detailing the draft regulations. The main new requirement proposed for the remuneration report is for companies to compare the annual change in directors’ remuneration with the annual change in average employee pay over a rolling five-year period. This will provide greater transparency on how pay in the boardrooms of quoted companies aligns with pay and reward across the company as a whole. It will also complement a new obligation introduced by the Government last year for quoted companies to disclose and explain each year the ratio of their chief executive officer’s total annual pay to the average pay of the company’s UK employees. The draft regulations additionally propose that future remuneration reports show the split between fixed and variable pay for each director in each year. Taken as a whole, the new measures will further strengthen confidence that the UK’s executive reporting framework is based on transparent, consistent and accessible public reporting to shareholders.

I will also highlight two provisions that will ensure the compatibility of the new measures—which, as I have said, originate from the revised shareholder rights directive—with the UK’s existing company law framework. The first concerns the scope of the companies covered by executive pay reporting. The UK’s existing executive pay regime applies to quoted companies, whereas the shareholder rights directive that the draft regulations will help to implement applies to traded companies. In practice, the vast majority of traded companies are also quoted, meaning that their shares are both tradeable on the regulated markets and quoted on the FCA’s official list. The draft regulations address this small technical difference in company definitions between the directive and UK company law by providing for executive pay reporting to apply both to quoted and to traded companies, whether or not they are quoted on the official list.

The second provision, which will ensure compatibility between the new measures from the directive and existing UK law, is a small procedural change to the Companies Act to allow shareholders to retain their existing right to a binding vote on any proposed payments to directors that would otherwise be outwith the terms of the directors’ remuneration policy. This procedural change provides that shareholder approval for any payments to directors outwith the remuneration policy result in an amendment to the policy for the purpose of those payments. In this way, UK law will be compatible with the requirement in the directive that all payments to directors must be in line with a shareholder-approved remuneration policy.