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Speaker 1 Hello, my name is David Stiles. I'm director of corporate Governance and Stewardship at the Financial Reporting Council, and we have commissioned some research on corporate governance, on remuneration reporting in the UK Corporate Governance Code from ������� University. The full team there is Dr. Karen McBride. Dr. Ahmed, about Dr. Khalid Hosseini and Dr. Tarek Abdel Fattah. And I'm going to be talking today to Dr. Karen McBride and to Dr. Ahmed Abood about that research and going a little more into a little bit more detail about it I'm going to start with is just a little bit of background from the point of view about why we commissioned the research in the first place. So I'll deal with that briefly before talking to Karen and and on. So first of all, as I say, many of you will know remuneration is a is an important subject in the UK when it comes to directors, executive directors, particularly of UK premium listed companies at much of their corporate governance when it comes to executive remuneration is dealt with in the law and in regulation. So since 2000 to company law, we've had the directors remuneration regulations and they were followed up in 2013 by further accountability and disclosure regime when it comes to directors remuneration in premium listed companies and it continues to be a important and contentious issue where the UK corporate Governance Code comes in is that it supplements the accountability and the disclosure requirements of the law and the regulation. And that's because in the UK we have a comply or explain regime. There is some flexibility around around governance and we also have a unitary board system as well. And in the union unitary board system, it's the remuneration committee which has an important role to play when it comes to directors remuneration. And the code also brings in a number of principles when it comes to an action and answer and more detail provisions as well as what we require boards and companies to disclose and how we expect them to be accountable to the shareholders. And what we were interested in at the FRC was the changing nature of reporting. So in 2018 there was a very substantial revision to the UK Government's code, in particular when it comes to remuneration, we introduced much clearer reporting on the purposes of remuneration in terms of the remuneration policy and setting out what policy should be and also what the outcomes of that remuneration would be as well. And that incorporates the remit role of the remuneration committee and it also deals with important issues such as engagement with the workforce, which was a key theme that ran through the 2019 substantially revised code. So we're very, very interested to compare reporting on the code from from past from past years and the changes that took place in 2018 to how companies responded to those changes. So that's why we commissioned the research and that's why I'm talking to Karen Price and I met up today. So I'm going to start off, if I may, with you, Karen. Perhaps you'd like to tell us just a little bit more about the background to your research and how you went about it.

Speaker 2 Yes, certainly. Thank you, David. So the project we undertook examined the remuneration policy disclosures, the sample of see 350 companies during the periods both before and after the introduction of the 2018 UK Corporate Governance Code. The research also analysed shareholder voting on companies revised remuneration policies at their 2020 annual general meetings. The first applying to that code. Thus, the project assessed evidence of the impact of the code's new principles and provisions relating to directors remuneration. So how do we do this? I will explain Part A and I will explain part B. Over to you.

Speaker 3 Okay, Thanks, David, and thanks, Karen. It's really we as indicated, the first objective was to assess the extent of which revise policies adhere to the code, new principles and procedure, and also to assess whether we have additional disclosure compared to previous remuneration reporting. Well, to achieve this objective, what we have done is we have examined the remuneration policy related disclosure in the Remuneration Committee report using both manual and computerised content analysis. So what we have done in the two approaches is we have quoted one year before and one year after the introduction of the new Corporate Governance Code in 2018. We have tried to include evidence of some of it in our analysis. So we have selected a representative sample from the 129 companies that has revised their remuneration policy for directors. And to make sure that we have a positive samples. What we have done is we have taken into account also the sector. So we have a representative samples of all sites by turnover and from as diverse a range of sector as possible to make sure that we have this. What we have done technically is we have divided the companies into four quartiles based on the size and then we have selected 25% from each time taking into account that we should include high diversity from different sectors in our sample. And then Karen will give you more details about the second part of the project and how we approach it.

Speaker 2 So with the second part of the project, a list was compiled of the first 350 companies that had revised their directors remuneration policies, thus incorporating the changes in the code. The company's AGM voting around directors remuneration was examined to assess any dissent over newly revised policies and the reasons for this dissent. And we took 20% as our cut-off for that dissent, because that is the amount in the code trying to see whether dissent. What we were trying to do was to see whether dissent was related to the policy itself or the resultant levels of pay. So to achieve this, the extent of dissent was recorded by noting those companies with 20% dissent. We looked at AGM explanations, and we followed this up by looking at update statements. These are the statements required six months after the AGM after consultation with shareholders. We also investigated previous dissenting votes to give this a context, and we looked at media comment around the time of the AGM in order to provide further information.

Speaker 1 Thank you both. That's really helpful background to understand the the approach that you took to the to the research. And what would you say were the most important findings from the research?

Speaker 3 This is a key question about doing research. So basically, if we want to come to, you know, a general statement about our findings, we can say that we generally found improvement in the content of the reported information. There was an increase in the accidental disclosure of all enumeration principle and provision in 2019 compared with 2017. So basically you have seen companies disclose more information about engagement with shareholders, more information about alignment with long term shareholders interests, and also more discussion on the engagement with the wider workforce. In total, we can reflect on a positive impact of the code requirements on corporate remuneration disclosure practices. More disclosure we can see. Having said that, our finding also direct incentives. Some areas that need further improvement and I will give some examples of this. For example, holding a sign will lose us to many companies used wording that did not give additional insight or explanation. Also noted that many companies provide information about the risk associated with excessive awards. However, excessive blame XL plans to mitigate this risk as this was disappointing. As if we have this information that would be would be very useful to shareholders and reader to know more about the risk and how you mitigate the risk. Also, we noticed that many companies used non financial advice and I will give examples of some companies used like environmental, social and governance indicators as part of the executive pay. But the issue with this is there was lack of details about how the link this was a strategy. So as he mentioned it, but there was no details about how to link it to the strategy. Also, we find that the companies claim the link between individual awards and the delivery of the strategy and long term performance. But fewer companies provide evidence generation policies that not reward more performance. So there is no really more discussion about rewarding and how to deal with the poor performance. Adding more, we find that there a bit of clarity and better improvement in the way the engagement with the shareholders. However, on the list extent, the discussion about the engagement with the workforce is a bit limited. If we compare it with the engagement with the shareholder overall, we have a progress in the regulation of reporting following the change of the court was there are still areas for further improvement. And now I will hand you to current to provide some details about the findings of the second part of the project.

Speaker 2 So for the second part of the project, the research found that the companies with a 20% discount for conforming to the code requirements in providing ATM comments and update statements say the voting was first compared with previous voting on directors remuneration policies. So three years previously. To provide a context for this voting, most of the companies had very low rates of dissent in their previous shareholder vote on the directors remuneration policy. Two had similar rates and one company actually had a higher rate of dissent in the previous vote. We found that companies with dissenting votes were reluctant, at least initially in 18 reports, to disclose the reasons for any significant votes against remuneration policy proposals. That is, unless this gave an opportunity to be rather positive. So, for example, to justify the proposal or to claim the dissent was less than previously experienced. We found a very careful use of words around reporting of shareholder dissent, both in the AGM reports and in the update reports. And it will be really interesting to look at this further. Our further analysis related to media reports around the companies at the time of the AGM, and this suggests that the dissent was often related to quite company specific issues and not really a result of the requirements of the code or due directly to directors remuneration.

Speaker 1 Thank you. Thank you, Karen. So we've heard a lot about increased disclosure when it comes to remuneration. But to what extent, Ahmed, would you agree with the assertion that that doesn't always in all cases appear to equate to better reporting and better insight for investors?

Speaker 3 Oh, that's really a tricky one. And coming from academic background, and we usually look at the disclosure and we usually see increasing demand from shareholders and the stakeholders for more transparency. And generally that increased disclosure should enhance corporate transparency and accountability of management. As I've mentioned in the previous bosu finding, we find improvement in the extent of the reported information. I'll give you some examples of this. We found that around 90% of our sample provided information about aligning the executives remuneration with the company purpose and values in 2019, and this compared with 70% in 2017 that we have considered a good improve and a big improvement in the reported information. Another example is we have seen around 58% of our sample provide information about see how the workforce policies and practices are consistent with the company's values in 2019 as compared with only 22 in 2017. So I've moved from 50 58% to from 22% to 58%. That's a massive improvement. However, when you mention Z better insight and the disclosure, we should be careful about interpreting the increased disclosure and just simply for the simple reason. The first one is sometimes the increased disclosure is often denied. I'm not specific, and also because disclosure is not the same as conduct or action. So simply we have to stress this fact. Disclosure is not the same as conduct and actions. Indeed, some companies often use a strategy of managing disclosure and managing reporting without actions, without actually change or adjustment. So we can be careful about we look at the entities disclosure. It's a good science that we have more disclosure. But for some companies they tend to play with the disclosure and manage it somehow without doing any action or in conducting any adjustment or change.

Speaker 1 Thanks. I mean, that's a that's a really interesting observation, said Hugh Current. I mean, continuing this theme that the report talks about, or that what we often term is boilerplate reporting effectively means mirroring or reflection wording in the code and putting it into context. And that it seems to be examples of that. Were you surprised by it?

Speaker 2 So, yes, our research found that many company reports were similar. Often companies just repeated the wording from the code in order to evidence disclosure. So they used, as you say, boilerplate language or templates for explanations or used similar wording to previous years. This resulted in a lack of detail of the way the code principles and provisions related to the innovation had actually been applied. Yes, we were surprised by this as we had expected companies to take the opportunity to inform their shareholders and other stakeholders of the individual details of their particular company. An example of this relates to the code requirement to promote effective engagement with the workforce force. For example, so companies confirmed that they promoted effective engagement but didn't disclose exactly what that entailed. So for example, they didn't talk about the message of engagement. They didn't talk about whether this was two way engagement and whom it was with. Also, what explanation had been given to the workforce. There was no detail of that or how executive remuneration aligned with wider company pay policy and what the workforce had been told about how that worked. And the other thing they didn't really do was to report any views expressed by the workforce relating to this. So, so yes, more specific detail would enhance the reporting of individual companies.

Speaker 1 Thank you. Count Centre to you again. On a slightly different subject, you said earlier that you considered the approach from companies in different sectors. Could you tell us a little bit more about that?

Speaker 3 Yeah, certainly. We have looked at the disclosure and and the principle and provision from companies, from different sectors. And even we have looked at the Footsie 100 against the 4250 and we noticed that 4150 provide more information about the compliance with the principles NZ 4250. But when you look at the provision, we have seen a similar pattern of disclosure for both the Footsie 140, 250 of which consider the sector level. We have looked at different sectors. And what we have noticed is there is no specific sectors that are exempt in all the and provision. Basically, we have wide variations not only among the sector but also among the principal and provision in the same sector. I'll give you some examples. For example, we have noticed that sectors such as customer, discretionary healthcare and utilities that provide more information on principle be. We have also noted that to close you have to provide more information on principle. In one is clear utilities provide more than the lowest level information on principle. E In general, the telecommunications sector, for example, provides the lowest overall level of disclosure. Release it to the principal and the provisions and is followed by the real estate and the energy and basic materials sector. Again, this to conclude, we have seen a variety and variations in the disclosure as the principal provision among the sectors we have in our summary.

Speaker 1 Thanks. I mean, that's a that's an interesting conclusion. Looking now at AGM and vote Karen, Research looks at shareholder dissent and they vote against pay policy. They often appear to be a little more complex than just relating to the policy. Could you delve into that a little bit further?

Speaker 2 Yes. So in order to investigate whether dissenting votes related to other factors than just pay policy, we looked at the voting on other proposals in the same AGM to see how that voting cut, what dissent there was for that voting for most of the companies. It appeared that there may have been other factors that were influencing the voting. So similar voting on different policies. Whilst for a quarter of the companies there was no real dissention against other policies in the same AGM for the remaining three quarters of the companies. So the companies with 20% dissent. The shareholders also voted against other policies relating to directors in the AGM. So that might suggest that for these particular companies the dissent was related to something company specific and not to the issues reported as a result of the innovation requirements of the code. We also, in order to enhance this slightly and to find out a little bit more background detail, we also looked at media reports around the time and we were to see if there was anything, any other issues that could cause dissent within ATM's. And we found linkages with, again, with company specific issues and also with more general issues for companies. So for example, COVID related difficulties which may have caused shareholders to query why directors remuneration had not been impacted in the same way as some other aspects within the company.

Speaker 1 Thanks, Karen. And continuing with you on the same theme. What were your findings in terms of how companies reported and try to try to understand the reasons for the shareholder concern?

Speaker 2 So yes, while most companies conformed to the code requirements, they seemed reluctant to disclose the reasons for any significant votes against remuneration policy proposals, particularly within the AGM reports, unless that was to justify the voting. So. So they voted. So they reported in quite a positive way. The companies often reported on the AGM by recycling the words of the code. So the announcement, for example, that the company would produce an update on shareholder engagement within six months at the annual general meeting. That was often announced using exactly the wording from the code. We followed up on the AGM reports by looking at the update statements to see where the companies reported in little bit more detail after consulting with shareholders. Whilst what we found or what I found was the requirement to report back after consulting with shareholders had led to some changes. These varied ineffectiveness from justifying the policies already proposed to delays in salary changes and even to pension contributions being revised. So they were acting in some cases on what they were finding and reporting that back to the shareholders via the update statements. However, the other thing we did find was that there was a very careful use of words around the reporting of shareholder dissent, which is understandable, but this was often overly positive and it would be really interesting to carry out further research into the use of wording within AGM reports and update statements.

Speaker 1 Thank you very much, Karen. And the final question and this the final question is to you as well, Karen. Just to to to sum up the key findings from the report and any advice that you would give to companies or reporting in the.

Speaker 2 Yes, very briefly. So summarising what we've said previously, genuinely, we found improvement on the extent of information, provided there was an increase in the extent of disclosure for all of the principles and provisions on the previous year that we looked at relating to remuneration after the new corporate governance code, whilst there were increases in disclosure on remuneration reporting following these changes to the court code, there are still areas for further improvements. For example, a disclosure on the code requirements related to workforce was actually increased on previous years, but in actual terms it was still lower than for other principles and provisions of the code. So these disclosures could contain more detail on the way in which a company engages with the workforce. The explanations given the feedback received and more detail on how executive remuneration aligned with wider company pay policy. Many company reports used wording that didn't actually give much additional insight or explanations. They used standardised wording and they repeated things from the code. So we would suggest less use of standardised wording from year to year or from the code and more personalisation of the reporting around directors remuneration, and that would provide greater insight for the shareholders and other stakeholders looking at these reports. I'd like to take the opportunity to thank the Financial Reporting Council for giving us the chance to carry out this interesting research project. My team has let Tarek Ahmed and myself have really enjoyed working on this project. Thank you very much.

Speaker 1 Well, thanks to you, Karen, and thanks to the whole of the football team. We're very glad that we commissioned this research from you. We found it a very good experience at the. The research itself is a good quality and we it's given us a lot to think about remuneration as a as a subject to governance subject is certainly not going to go away. We've got an AGM season with us very soon indeed, and new research has given us a lot to think about. And as many of you will know, we carry out an annual review, as I mentioned at the beginning of a corporate governance report. So this research has really helped us focus our attention on the kind of things that we need to be looking at, particularly in terms of remuneration, reporting on the code, and we'll be focusing in on that when we produce our report at the end of the year. And of course, the other issue which I've already mentioned is is AGM. The votes around remuneration and the quality of reporting that takes place when those votes are contentious. These are all issues that we need to take into account. So thank you very much indeed