Corporate governance regulations: Are you ready to report?
Lisa Wallis and Gemma Spiceley, April 02, 2019
The Companies (Miscellaneous Reporting) Regulations 2018 means organisations need to follow new rules around employee engagement and reporting on executive pay ratiosThe Companies (Miscellaneous Reporting) Regulations 2018 came into force on 1 January 2019 and require qualifying UK-incorporated companies to include new content in their annual reports. According to business secretary Greg Clark, the new regulations are a “key part of the wider package of corporate governance upgrades to help build a stronger, fairer economy that works for businesses and workers".
In addition to placing obligations on quoted companies, some of the new requirements apply to large private companies for the first time.
Employers may be unaware of these new obligations, which will require regular collation, compilation and reporting of relevant information. Company directors should familiarise themselves with the new requirements and plan ahead to ensure internal procedures are adapted in readiness for compliance.
Reporting will generally begin in 2020 for activities undertaken and information collected in financial periods that started on or after 1 January 2019. However, one new obligation that requires quoted companies to illustrate the impact of share price increases on executive pay outcomes applies to all new remuneration policies proposed on or after 1 January 2019.
Statement of engagement with employees
All companies with more than 250 UK employees must include a statement in the directors' report summarising how the directors have engaged with employees and taken account of their interests. If the company is a parent company, it is the number of employees in the group that is relevant. The statement should describe action taken during the financial year to introduce, maintain or develop arrangements aimed at:
- Systematically providing information to employees that is of concern to them as employees, such as a business performance update.
- Consulting employees or their representatives regularly to take account of their views in making decisions likely to affect their interests.
- Encouraging employees' involvement in the company's performance through employee share schemes or other means.
- Achieving a common awareness of financial and economic factors affecting the company's performance.
It should also describe the manner and effect of this engagement with employees on the company's principal decisions taken during the financial year. This forces qualifying companies to have employees in mind when making decisions.
Reporting on executive pay ratios for listed companies
Quoted companies with more than 250 employees are required to publicise in the directors' remuneration report the ratio of the CEO's remuneration to the median, 25th and 75th quartile pay remuneration of their UK employees, together with supporting information and an explanation. As with gender pay gap reporting, the obligation to publish executive pay ratios will inevitably lead to some companies being perceived as fairer than others. Adding supporting comments in the directors' remuneration report will be critical in helping to give context to the numbers.
Section 172 statement
All large companies meeting certain criteria are required to include a statement as part of their strategic report describing how the directors of the company have had regard to the matters listed in section 172(1)(a) to (f) of the Companies Act 2006. This applies to all companies meeting at least two of the following criteria:
- Turnover of more than £36 million.
- Balance sheet total of more than £18 million.
- More than 250 employees.
Government guidance states that the section 172 statement must be made in a separately-identifiable section of the company's strategic report, be available on a website (be that the company's own or one maintained on its behalf) and remain available until the following year's statement is released. While all directors have a duty to consider the matters in section 172, this creates an administrative hurdle for large companies to show how they have done this.
Further requirements under the regulations
- UK incorporated companies with either more than 2,000 global employees or a turnover more than £200 million globally, and a balance sheet total more than £2 billion globally must produce a statement about the corporate governance arrangements applied by the company.
- UK incorporated companies meeting certain criteria must include a statement summarising how directors have engaged with suppliers, customers and others in a business relationship with the company.
Non-compliance and further guidance
If the directors of a company knowingly or recklessly fail to comply with any of the required provisions, they will commit an offence.
The Department for Business, Energy and Industrial Strategy has published a very useful document, Corporate governance: The Companies (Miscellaneous Reporting) Regulations 2018 Q&A, to help companies understand their obligations.
Lisa Wallis and Gemma Spiceley are both senior associates at law firm Blake Morgan