All companies – not just banks – will have to be able to claw back directors' pay and prove bonuses are linked to performance under a new City code published on Wednesday.
The biennial review of the corporate governance code will also require companies to provide more information for shareholders on the risks they run and how long they will be able to continue in business under their current financing arrangements.
The Financial Reporting Council (FRC) code comes after a lengthy and fraught consultation involving shareholders, companies and their auditors, and sparked the concerns of the Institute of Directors. Some 1,300 companies are subject to it, on a "comply or explain" basis – allowing deviations if shareholders are provided with an explanation.
The changes to pay are broadly in line with changes to the law already under way.
The FRC also put the City on notice that its next review, to be completed in two years, will tackle boardroom diversity, which is currently in focus because of the target set by Lord Davies for 25% of the seats in FTSE 100 boards to be held by women by 2015.
The FRC intends to include provisions on boardroom diversity when it updates its guidelines on succession planning for company bosses. "Diversity can be just as much about difference of approach and experience. The FRC is considering this as part of a review of board succession planning and will consider the need to consult on these issues for the next update to the code in 2016," it said.
The more immediate changes require an extension of clawback arrangements already imposed on bankers by City regulators. The code sets outs that companies should have arrangements to enable them to "recover or withhold variable pay when appropriate to do so". The code also requires companies to consider how long directors should wait before receiving their bonuses and also put more emphasis on ensuring pay policies are linked to performance.
"The changes to the code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation," said Stephen Haddrill, chief executive of the FRC.
He added: "The changes on remuneration also focus companies on aligning reward with the sustained creation of value rather than, as before, simply on retention – a focus that has tended to promote pay escalating and leap-frogging."
The code also incorporates changes recommended by former Aviva boss Lord Sharman in his 2012 review into how ompanies and auditors should describe the ability of a company to keep operating as a going concern. The review was commissioned in the light of the bailout of banks in 2008.
The Sharman proposals have been subjected to two years of consultation and sparked controversy, most recently in July when investors were concerned that the outcome would be weaker then intended. Under the code, companies will now make two statements – one based on accounting rules and one requiring directors to assess their ability to keep operating for more than 12 months. This may yet prove controversial with some investors who had argued there should be just one statement.
"Recognising the different circumstances of companies, they will be allowed to choose the period over which they look forward but we are clear this should explain their reasoning to investors," said Haddrill.
Roger Barker, director of corporate governance at the IoD, said he was concerned about the need to produce these so-called viability statements. "The future is inherently uncertain and companies do not have crystal balls. Although investors would like companies to provide them with certainty about their future prospects, this is often not realistic," Barker said.
Robert Hodgkinson, the head of the accountancy body ICAEW, questioned whether the new requirements on pay would help to reduce bonus levels. "Some research suggests that companies are changing their remuneration policies. However, what impact these changes will have longer term is hard to tell. There has been a trend for remuneration to increase over the past years despite efforts to contain it," said Hodgkinson.
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