A stark industry warning from Andrew Ninian of the Investment Association opened the debate on the Corporate Governance Code at Equiniti’s 2018 Employee Services Forum: take action or face further, more punitive, regulation.
The response from the room was clear: a lot of companies are well on their way to adopting the revised Code and reporting regulations, often using and improving the systems and processes they already have in place. Many are going much further, working to really build the trust of the public, employees and investors. The key now is clearly communicating with these stakeholders and shareholders on the current situation and how progress is being made.
Two key areas of the Corporate Governance reform package were focused on during the forum: pay ratios and reporting on directors’ duties – including all-important employee engagement. This article outlines insights and recommendations on each.
1. Pay Ratios
Ahead of the regulation, 11% of FTSE100 companies have already disclosed indicative CEO: workforce pay ratios. Around half of delegates voting in our poll at the forum told us they are planning to reveal an indicative CEO pay ratio in their 2018 annual report and accounts, one year ahead of the requirement in the regulations. But we also found that the majority of those voting have not yet decided which calculation methodology to use for their company’s pay ratio disclosures.
What this tells us is that a handful of companies are well ahead of the curve when it comes to implementing this new disclosure requirement, while others are still considering how best to address this.
Andrew Ninian believes that although it is early days, there is no time to wait, stating that he and investors encourage early adoption.
How to Calculate
Nearly half (49%) of attendees have not decided how they will carry out the calculations. For those who are unsure where to start, it is useful to note that we found the most popular options being used are the actual ranking of pay and benefits (19%) and using gender pay data (also 19%). Going forward, it’s thought that the already existing gender pay gap material will be the starting point for most businesses.
How to Report
Calculations are just the initial piece of the puzzle. “The number is what the number is,” Daniel Hepburn from PwC stated, “The harder piece – and the area I’m finding clients are looking at more closely than I’d anticipated at this stage – is what to say about it.”
Matt Findley from Norton Rose Fulbright added that it’s important to think about how you will report not just this year but every year. To tell your story, is there anything else you want to build in for comparison? “The figure itself is going to be big. There’s not a lot that we can do about that. But it’s about the context… It’s about culture, values, strategy and showing as best as you can the clear rationale behind pay levels.”
David Ellis from EY goes further, believing: “You have to look at your pay strategy as a whole and that will change the way, going forwards, you decide how much to pay. Executive pay can no longer be viewed in a vacuum.”
2. Reporting of Directors’ Duties
Starting the new Strategic Report disclosures
The Investment Association advice is to focus on three areas.
- Who are your stakeholders?
- How does the board engage with them?
- How have their views been taken into account?
When it comes to how to report on director’s duties, and in particular how to ensure employees’ views are reflected in decision-making, again the room was split when voting in our poll, but clearly most companies are already in a good position, reflecting the existing requirements of the Companies Act: only a fifth (21%) will be introducing new processes for engagement with stakeholders as a result of the new reporting requirement. Half (52%) already have appropriate engagement mechanisms to hear from stakeholders and will look to improve or evidence the link with board decision-making.
Sally Chandler, from Prism Cosec, commented: “There are a number of options and channels of communication that you already use that you could continue to use. It’s really about understanding how you pull that together to be able to report on this.”
How to Engage
Of the three ways to gather employee feedback, many attendees will combine a number of the options. Chris Stamp, also from Prism Cosec, was not surprised by these findings. When workforces are all so different in size and distributed across the world, there is no one-size-fits-all-solution – for instance, how people in a high-tech company communicate with each other is likely to be different to those in a more traditional industry.
Additional tools that are being used by attendees to truly engage employees above and beyond the regulations include both open and closed social media networks, surveys, anonymous online reporting and employee AGMs.
FRC Guidance on Reporting
- Be clear about different sections of the workforce
- Use informal and formal channels
- The Code should not displace established channels of communication and consultation arrangements on pay
- For a director appointed from the workforce, training and support will be critical
- Other methods of communication are valid provided they deliver meaningful, regular dialogue and are explained clearly
- NEDs should consider ways of increasing visibility among the workforce
For many companies then, the package of reform introduced in the revised Corporate Governance Code and reporting regulations is about amplification not duplication. It’s not about starting from scratch but providing a fuller picture of what is already happening, and how it is being improved further. As Suzannah Crookes from Pinsent Masons put it: “What might look like a challenge and an additional obligation is actually turning into an opportunity to publicise the good practices that are already going on.”
For more information, take a look at the slides from the sessions covered in this article:
- Plenary 1: Panel on Executive Remuneration and Plan Design
- Breakout 1: Employee Engagement in the Boardroom
- Plenary 3: Corporate Governance Reform