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How will Corporate Governance Code impact HR?

John Deacon

Leaders in HR, Finance and the office of the Company Secretary are likely to become more involved in the debate, design and reporting of company-wide remuneration this year as new governance principles come into effect. Contributor John Deacon, Head of Employee Benefits – Buck. 

The updated Corporate Governance Code from the Financial Reporting Council  (FRC) bites from the beginning of this year and is expected to have a direct impact on how companies report on their payment structure, posing a huge challenge for those senior managers in HR involved in setting and agreeing reward structures. 

It is therefore crucial for HR teams to be proactive in their understanding of the Code’s principles and objectives. They will need to ensure that the correct procedures are in place in order to demonstrate both compliance with the principles or at least be prepared to explain their position. Overall the FRC will be looking at compliance with the spirit of the Code; to improve public trust in business by urging employers to establish a culture that promotes integrity and values diversity at board-level.

The UK Corporate Governance Code, published by the FRC in July 2018, applies to all companies with a premium listing of equity shares in the UK. Specifically, the requirement is for these companies to report in their annual report and accounts on how they have applied the Code.  

Through a series of principles and provisions, the Code sets out how the company board and the remuneration committee should oversee remuneration strategy such that it is clear there is alignment between pay for executives and the purpose and values of the company, demonstrating a clear link with the company’s long-term strategy and aims for success. This year will be the first time that reward goes under the microscope, with initial disclosures due to be released in 2020. 

The Code seeks to encourage boards to engage with their workforce, understand employees’ views and be ready to justify any executive-level decisions in this area. To maintain this fair-minded approach, the Code states that the board chair should not remain in post beyond nine years from first election to the board, and that all directors should be subject to annual re-election and will need to undergo a formal and rigorous evaluation of their performance each year in order to keep their position within the company. 

Perhaps most importantly, the Code seeks to ensure that the people occupying the most senior positions within a company are competent enough to do so. To this end, the Code will champion a far higher level of transparency, with particular focus on renumeration and improved fairness across the workforce.

With specific regard to bonuses, the Code calls for a formal and transparent procedure for developing policy on executive, director and senior management remuneration. No director will be involved in determining their own remuneration outcome. They must also validate how directors take staff and other stakeholders’ interests into account when they decide on salaries and bonuses.

The Code’s focus on transparency and fair renumeration is relevant even outside of its principles. Employers are facing increased pressure to deliver greater equality when it comes to pay. There are numerous examples of this taking place, with more and more employers signing up to the Real Living Wage or providing fairer bonuses across the company. Not only that, but as staff awareness of fair pay within their organisations grows, companies will need to make a concerted effort to respond to any employee concerns in this area. 

With the Code demanding increased transparency across the company, businesses may be concerned about the practicalities of ensuring they are maintaining this fair approach to their employees. This is where HR needs to invest in technology to monitor and promote fairness in the business.  

We are already seeing businesses invest in single, centralised platforms to establish more transparent reward structures. By doing this, they ensure that any remuneration provided comes as a direct result of the tangible results that have been accomplished, rather than senior management preferences.

Solutions like these also ensure greater accuracy and consistency, as rewards can be applied more accurately with limited room for human error. Moreover, because they remove the opportunity for personal relationships or preference to play a factor in decisions on pay, they are far more likely to allocate a fairer slice based on specific roles played, and goals achieved. 

Overall, the FRC is striving to create a more level playing field within businesses. HR is feeling  the knock-on effect of these changes, as senior managers strive to understand the requirements of the Corporate Governance Code. This is putting pressure on HR to work closely with management and provide accurate insight across the workforce; not only to ensure that the business can demonstrate compliance with the Code , but also to create a true culture of fairness and equality.

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