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Board of Directors and Committees

UK listed boards combine executives and independent, non-executive directors (NEDs). The Code recommends that at least half the board, excluding the chairman, comprises independent NEDs. The Code also recommends that there is a clear division of responsibilities at the head of the company and so practically all boards separate the roles of chairman and chief executive. Many boards have also appointed a "senior independent director" in addition to the chairman, whose role is, among other things, to act as an additional channel of communication between the board and shareholders. Most boards maintain an audit committee, a remuneration (compensation) committee and a nomination committee.

 

The Audit Committee

UK implementation of the European Union's Statutory Audit Directive, in the Disclosure & Transparency Rules, imposes a requirement, for all companies whose securities are traded on a regulated market in the EU to have an audit committee (or equivalent body). The Disclosure & Transparency Rules include details of the minimum functions of the audit committee. The Code also includes provisions on the composition and role of the audit committee and these are fully compatible with the Disclosure & Transparency Rule requirements. The Code recommends audit committees be comprised of at least three members, all of whom should be independent non-executive directors and one of whom should have recent and relevant financial experience.  The 2016 update to the Code includes a provision requiring the audit committee as a whole to have competence relevant to the sector in which the company operates.  The Disclosure & Transparency Rules expect the audit committee to have at least one member with experience in accounting and/or auditing, however indicate that this requirement can be met by meeting the Code composition requirements.  Under the Competition & Markets Authority’s final Order (relevant to FTSE 350 Companies), the audit committee has increased responsibilities in relation to supervision of the external audit relationship, which largely put existing best practice on a statutory basis.   

The Remuneration Committee

Executive pay remains a topic of considerable debate in the UK. Investors, led by the Association of British Insurers (ABI) and National Association of Pension Funds (NAPF), keep close watch on pay schemes that exceed accepted norms.  Share option schemes are common, as are restricted share unit schemes. Service contracts for chief executives are also watched to ensure that payouts on departure do not exceed one year's remuneration.  Shareholders have sought to increase their power over remuneration through binding votes and in August 2013, new Directors' remuneration regulations were approved by Parliament requiring the policy report to be subject to a binding shareholder vote.  They are effective for periods ending on or after 30 September 2013. As a result, the remuneration committee is being made more accountable to shareholders for directors’ remuneration. 

The Companies (Miscellaneous Reporting) Regulations 2018 which have been laid before Parliament require, for the first time, Quoted and UK registered companies with more than 250 UK employees to annually publish and justify the pay difference between chief executives and their staff – known as ‘pay ratios’. Such companies will also need to illustrate the effect of future share price increases on executive pay outcomes to inform shareholders when voting on long-term incentive plans.

The Nomination Committee

Together with the audit and remuneration committees, the nomination committee makes up the three standing committees of a listed company’s board of directors.  This committee is charged with the critical role of enhancing the quality of nominees to the board, setting policy around board appointments and specifying descriptions of the role and capabilities required for board appointments in light of existing skills and experience of current board members.  The nomination committee is receiving more attention due to shareholders and regulators questioning the integrity of board appointments from a quality and diversity perspective.  Increased focus on succession planning is likely to lead to increased regulatory and investor focus on the activities and reporting of the nomination committee.

Correction list for hyphenation

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