limited companies’ compliance with codes of corporate governance

2000 words

you need to find specific companies, and put the screenshot on the essay 

Assessment

Brief

Module Name: Corporate Governance

Module Code	Level	Credit Value	Module Leader
ACC3017	6	20	Dr Stuart Farquhar

Assessment title:

ES1: Essay

Weighting:

50%

Submission dates:

Monday 18th January 2021

Feedback and Grades

due:

Please see NILE under Assessment Information

Please read this assessment brief in its entirety before starting work on the Assessment Task.

The Assessment Task

The assessment focuses on limited companies’ compliance with codes of corporate governance.

As a risk and compliance analyst, you have been asked to complete a review of a company listed on the FTSE100 index as of September 2020 as it complies with the 2018 UK Code of Corporate Governance. Your company will be allocated to you in the first two weeks of the module and the list will be added to the NILE site. Each student will be allocated a different company. During the module you will be able to and expected to use your company in class activities both individually and in small groups with your peers to help you develop your understanding of the requirements of the assessment. To undertake the assessment, you will need to obtain/download a copy of your company’s most recent annual report (2019 or 2020) within which there will be a section on Governance. This is the pertinent section of the report with which you will need to become very familiar.

Using your company’s corporate governance report, critically review the compliance of your company based on the following criteria:

1. Discuss the firm’s relationships with its stakeholders: Assess the extent of the company communications with stakeholders in terms of culture, company’s purpose, values, and strategy. Justify if the compliance to code requirements is evidenced. In the implications section, drawing on academic theory and evidence, critically evaluate whether your company’s approach is effective. (Approximately 200 words)

The answers should be structured as follows:

Company purpose and communication with shareholders	Approach and Justification Did the company comply with the code? Explain and justify (using evidence from the company report and the code)	Implications Drawing on academic theory and empirical evidence, critically evaluate whether your company’s approach is effective.
Communication with stakeholders (Culture, purpose and strategy

2. A. Evaluate your company’s approach to ensuring effective leadership as suggested by the UK Code of Corporate Governance. Does the company have a separate CEO-Chair or CEO-Chair Duality? Using academic theory justify the approach of your company. In the implications section, drawing on academic theory and evidence critically evaluate whether the separation of CEO-chair is important to financial performance. (Approximately 200 words)

The answers should be structured as follows:

	Board Characteristics	Approach and Justification Did the company comply with the code? Explain (using evidence from the company report and the code) and justify (using academic theory)	Implications Drawing on academic theory and evidence critically evaluate whether the separation of CEO-chair is important to firm performance.
Separated Roles of CEO/Chair Yes/No

2. B. Discuss the extent of your company’s compliance with the requirements for board independence? In the implications section, using academic theory and evidence critically appraise the importance of independence on board performance. (Approximately 200 words)

The answers should be structured as follows:

Board Characteristics

Approach and Justification Did the company comply with the code? Explain (using evidence from the company report and the code) and justify (using academic theory).	Implications Using academic theory and empirical evidence critically appraise the importance of board independence on board performance.
Independence Proportion of independent board members

3. Assess your company’s adherence to the composition, succession, and evaluation principles, by critically assessing the extent of your company’s compliance to board evaluation. In the implications section, drawing on empirical evidence in the academic literature appraise the importance of board evaluation on improving board effectiveness and company financial performance. Review your company’s case based on your analysis. (Approximately 300 words)

The answers should be structured as follows:

	Accountability Components		Approach and Justification Did the company comply with the code? Explain and justify (using evidence from the company report and the code).	Implications Using empirical evidence in the academic literature appraise the importance of board evaluation on improving board effectiveness and company financial performance. Review your company’s case based on your analysis.
Board Evaluation How often does the board undertake an evaluation of the board? Is there an external evaluation? Yes/No

4. Investigate your company’s approach to audit, risk, and internal control by examining its compliance to external auditor rotations. In the implications section, using academic theory and empirical evidence critically discuss the importance of external auditor rotation/independence on company exposure to risk. Drawing on the findings from the academic literature, evaluate the case of your company. (Approximately 300 words)

The answers should be structured as follows:

Accountability Components

Approach and Justification
Did the company comply with the code? Explain and justify (using evidence from the company report and the code).

Implications Using academic theory and empirical evidence critically discuss the importance of external auditor rotation/independence on company exposure to risk. Drawing on the findings from the academic literature, evaluate the case of your company.

External Auditors Who are the auditors of your company? How long have they been the auditors? How many years is their contract?

5. Detail the structure of remuneration for the CEO for the past two years (either 2020 and 2019 OR 2019 and 2018) in terms of the proportion of total remuneration/pay for each of the following elements: Fixed Pay (includes Salary, benefits & pension); Annual Bonus; Long-erm Incentive Plan (LTIP).

Explain the approach to remuneration and using academic theory justify the approach taken by the company.

In the implications section, compare and contrast the relationship between remuneration and firm performance with the empirical evidence in the academic literature. Which of the three theories (agency, managerial entrenchment/power, and institutional theory) best explains your company’s approach? (Approximately 400 words)

The answers should be structure as follows:

Remuneration Components	Approach and Justification Explain the approach to remuneration and using academic theory justify the approach taken by the company.	Implications Compare and contrast the relationship between remuneration and firm performance with the empirical evidence in the academic literature. Which of the three theories (agency, managerial entrenchment/power, and institutional theory) best explains your company’s approach?
Structure of Remuneration Most recent year (either 2020 or 2019) Total Pay – 100% Fixed Pay – % Annual Bonus – % LTIP – % Previous year (either 2019 or 2018) Total Pay – 100% Fixed Pay – % Annual Bonus – % LTIP – %

6. Conclusion – Write a conclusion that summarises the extent of your company’s compliance with all the requirements of the UKs Code of Corporate Governance. Drawing on the academic literature assess whether adherence to the code or not is important to the performance of the company. (Approximately 300 words)

Word limit

The maximum word limit for this assessment is 2000 words.

Where the submission exceeds the stipulated word limit by more than 10%, the submission will only be marked up to and including the additional 10%. Anything over this will not be included in the final grade for the assessment item. Abstracts, bibliographies, reference lists, appendices and footnotes are excluded from any word limit requirements

Learning Outcomes

On successful completion of this assessment, you will be able to:

· Level of understanding, analysis, and application to your company (30%)

· Level of justification, evaluation, and appraisal (30%)

· Quality of argument, synthesis, and conclusion (30%)

· Professional and academic quality of written work and accuracy of referencing (10%)

Your grade will depend on the extent to which you meet these learning outcomes in the way relevant for this assessment.

Please see the

grading rubric on NILE for further details of the criteria against which you will be assessed.

Assessment Criteria

· Level of understanding, analysis, and application to your company (30%)
· Level of justification, evaluation, and appraisal (30%)
· Quality of argument, synthesis, and conclusion (30%)
· Professional and academic quality of written work and accuracy of referencing (10%)

Assessment Support

Specific support sessions for this assessment will be provided by the module team and notified through NILE. You can also access individual support and guidance for your assessments from Library and Learning Services. Visit the

Skills Hub

to access this support and to discover the online support also available for assessments and academic skills.

Academic Integrity and Misconduct

Unless this is a group assessment, the work you produce must be your own, with work taken from any other source properly referenced and attributed. For the avoidance of doubt this means that it is an infringement of academic integrity and, therefore, academic misconduct to ask someone else to carry out all or some of the work for you, whether paid or unpaid, or to use the work of another student whether current or previously submitted.

For further guidance on what constitutes plagiarism, contract cheating or collusion, or any other infringement of academic integrity, please read the University’s

Academic Integrity and Misconduct Policy.

Also useful resources to help with understanding academic integrity are available from

UNPAC

.

N.B. The penalties for academic misconduct are severe and can include failing the assessment, failing the module and expulsion from the university.

Assessment Submission

To submit your work, please go to the ‘Submit your work’ area on the NILE site and use the relevant submission point to upload your report. The deadline for this is 11.59pm (UK local time) on the date of submission. Please note that essays and text-based reports should be submitted as word documents and not PDFs or Mac files.

Written work submitted to TURNITIN will be subject to anti-plagiarism detection software. Turnitin checks student work for possible textual matches against internet available resources and its own proprietary database. Work

When you upload your work correctly to TURNITIN you will receive a receipt which is your record and proof of submission. If your assessment is not submitted to TURNITIN, rather than a receipt, you will see a green banner at the top of the screen that denotes successful submission.

N.B Work emailed directly to your tutor will not be marked.

Late submission of work

For first sits, if an item of assessment is submitted late and an extension has not been granted, the following will apply:

· Within one week of the original deadline – work will be marked and returned with full feedback and awarded a maximum bare pass grade.

· More than one week from original deadline – grade achievable LG (L indicating late).

For resits there are no allowances for work submitted late and it will be treated as a non-submission.

Please see the

Assessment and Feedback Policy

for full information on the processes related to assessment, grading and feedback, including anonymous grading. You will also find the generic grading criteria for achievement at

University Grading Criteria

. Also explained there are the meanings of the various G grades at the bottom of the grading scale including LG mentioned above.

Extensions

The University of Northampton’s general policy with regard to extensions is to be supportive of students who have genuine difficulties, but not against pressures of work that could have reasonably been anticipated.

For full details please refer to the

Extensions Policy

. Extensions are only available for first sits – they are not available for resits.

Mitigating Circumstances

For guidance on Mitigating circumstances please go to Mitigating Circumstances where you will find detailed guidance on the policy as well as guidance and the form for making an application.

Please note, however, that an application to defer an assessment on the grounds of mitigating circumstances should normally be made in advance of the submission deadline or examination date.

Feedback and Grades

These can be accessed through clicking on the Feedback and Grades tab on NILE. Feedback will be provided by a rubric with summary comments.

2
ES1- Marking Rubric

 Levels of Achievement

Criteria

No Submission / no evidence

Fail

Pass

Commended

Merit

Distinction

Level of understanding, analysis, and application to your company

(30%)

0 points
Non-Submission

1 to 11 points
Weak to poor understanding and analysis of the codes of corporate governance. Weak to poor understanding of theories of corporate governance. Weak to poor application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

12 to 14 points
Satisfactory understanding and analysis of the codes of corporate governance.
Satisfactory understanding of theories of corporate governance. Satisfactory application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

15 to 17 points
Sound understanding and analysis of the codes of corporate governance. Sound understanding of theories of corporate governance. Sound application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

18 to 20 points
High quality understanding and analysis of the codes of corporate governance. High quality understanding of theories of corporate governance. High quality application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

21 to 30 points
Very high-quality understanding and analysis of the codes of corporate governance. Very high-quality understanding of theories of corporate governance. Very high-quality application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

Level of justification, evaluation, and/or appraisal

(30%)

0 points
Non-Submission

1 to 11 points
Weak to poor level of justification, evaluation, and appraisal. Little to no attempt to justify your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Little or no evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Little to no evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

12 to 14 points
Satisfactory level of justification, evaluation, and appraisal. Satisfactory justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Satisfactory evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Satisfactory evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

15 to 17 points
Sound level of justification, evaluation, and appraisal. Sound justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Sound evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Sound evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

18 to 20 points
High quality level of justification, evaluation, and appraisal. High quality justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. High quality evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. High quality evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance.

21 to 30 points
Very high-quality level of justification, evaluation, and appraisal. Very high-quality justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Very high-quality evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Very high-quality evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

Quality of argument, synthesis, and conclusion

(30%)

0 points
Non-Submission

1 to 11 points
Weak to poor level of argument with little to no support from academic theory and evidence. Weak to poor synthesis of the material. Weak to poor or no conclusion

12 to 14 points
Satisfactory level of argument with some acceptable support from academic theory and evidence. Satisfactory synthesis of the material. Satisfactory conclusion

15 to 17 points
Sound level of argument with commendable support from academic theory and evidence. Sound synthesis of the material. Sound conclusion

18 to 20 points
High quality level of argument with very good support from academic theory and evidence. High quality synthesis of the material. High quality conclusion

21 to 30 points
Very high-quality level of argument with excellent to outstanding to exceptional support from academic theory and evidence. Very high-quality synthesis of the material. Very high-quality conclusion

Professional and academic quality of written work and accuracy of referencing

(10%)

0 points
Non-Submission

1 to 3 points
Poor quality of academic writing, with many spelling, grammar and other errors demonstrating a lack of professional attention to the work. Poor or no referencing. Fails to apply the Harvard system of referencing.

4 points
Satisfactory quality of academic writing, with some spelling, grammar and other errors demonstrating a satisfactory professional attention to the work. Satisfactory referencing. A satisfactory application of the Harvard system of referencing.

5 points
Sound quality of academic writing, with few spelling, grammar and other errors demonstrating a sound professional attention to the work. Sound referencing. A sound application of the Harvard system of referencing.

6 points
High quality of academic writing, with minor spelling, grammar and other errors demonstrating a high-quality professional attention to the work. High quality referencing. A high-quality application of the Harvard system of referencing.

7 to 10 points
Very high-quality of academic writing, with accurate spelling, grammar and few other errors demonstrating a very high-quality professional attention to the work. Very high-quality referencing. A very high-quality application of the Harvard system of referencing.

0.1_MUL1564-FOUNDATION-Pay-ratios-report

An analysis of the first disclosures

PAY RATIOS AND
THE FTSE 350

Rachel Kay and Luke Hildyard
High Pay Centre

December 2020

Standard Life Foundation | Pay ratio report December 2020 2

CONTENTS

Acknowledgements 3

Foreword 4

Key findings and recommendations 5

High Pay Centre analysis of 2020 pay ratio disclosures: final report 11

Section 1: Highest and lowest pay ratios 13

Section 2: Pay ratios by industry 18

Section 3: Company characteristics 20

Section 4: Pay for low earners 24

Section 5: The potential to redistribute 29

Section 6: Narrative reporting 36

Conclusions and recommendations 39

Appendix A: Methodology 44

Appendix B: Pay ratio disclosure requirements 45

Standard Life Foundation | Payratios report December 2020 3

This research was funded by the Standard Life Foundation. We are also very grateful to the project
advisory group who provided advice on the research methodology, the findings and initial drafts of the
report. In particular, we would like to thank

• Ruth Bender – Emeritus Professor of Corporate Financial Strategy, Cranfield University

• Duncan Brown – Principal Associate, Institute of Employment Studies and Visiting Professor,
University of Greenwich

• Martin Buttle – Head of Good Work and Vaidehee Sachdev – Senior Research Officer, Share Action

• Caroline Escott – Policy Lead: Investment and Stewardship, Pensions and Lifetime Savings Association

• Deborah Gilshan – Independent Advisor, Stewardship and ESG and Founder, 100 per cent club

• Mubin Haq – Chief Executive, Standard Life Foundation

• Robert Joyce – Deputy Director, Institute for Fiscal Studies

• Alexander Pepper – Professor of Management Practice, London School of Economics

• Tom Powdrill – Head of Stewardship, Pensions Investment and Research Consultants

• Euan Stirling – Global Head of Stewardship and ESG Investment, Aberdeen Standard Investments

• Janet Williamson – Senior Policy Officer for Corporate Governance, Trades Union Congress

• Wanda Wyporska – Executive Director, The Equality Trust

We would also like to thank Steve Glenn, Head of Executive Remuneration Research at E-Reward, and
Dr Aditi Gupta, Senior Lecturer in Accounting and Financial Management at Kings’ Business School,
Kings’ College London, for providing data analysis for this report.

All opinions expressed in the paper (and any errors) are those of the High Pay Centre only.

Acknowledgements

Standard Life Foundation | Payratios report December 2020 4

Extreme income inequality is one of the hallmarks of the UK economy. Out
of 40 countries that comprise membership of the OECD group of leading
economies, the UK is the 9th most unequal.1 Other than the United States
of America, it is only emerging economies such as South Africa, Turkey and
Bulgaria that have a worse record on inequality than the UK amongst the
OECD member states.

It is largely pay for what Thomas Piketty termed the ‘super managers’ – leading executives and business
professionals – that has created the vast gap between those at the top and everybody else. Research
suggests that the average FTSE 100 CEO is now paid around 126 times the average UK worker, compared
to ‘only’ 58 times in 1999.2

Very high levels of inequality have a number of important implications:

• The potential link between higher inequality and greater social problems including higher crime levels;
poorer mental and physical health; and lower social mobility with more entrenched social divisions;

• The impact that pay gaps within companies have on business performance through factors such as
employee engagement and industrial relations;

• The way in which the distribution of pay by employers affects living standards for low- and middle-
earners, and the potential to raise incomes for those who need it most through a more even distribution.

In these respects, the new pay ratio disclosures that have begun to appear in UK-listed companies’ annual
reports from 2019/20 are of great value.

By showing the scale of pay ratios within companies, and eventually how they change over time, this will
enable better, more informed discussion and research into their social and economic impact.

Concrete pay ratio data will also provide stakeholders including investors, trade unions, policymakers and
of course the companies themselves with a means of measuring (and targeting) performance in respect
of pay distribution – hopefully contributing to a better understanding of both the scale and the basis of
prevailing levels of pay inequality.

This report attempts to begin that process, while also being mindful of the fact that this is the first year of
the pay ratio disclosures, and that there remains scope for both the calculation and the communication of
the figures to be improved. As such, our findings should be treated as the beginning, rather than the end
point, of a discussion about pay.

Luke Hildyard
Director, High Pay Centre

Foreword

1 OECD, Income inequality data, 2020 via https://data.oecd.org/inequality/income-inequality.htm
2 CIPD and High Pay Centre, Executive pay in the FTSE 100: 2020 review, 2020 via https://www.cipd.co.uk/knowledge/

strategy/reward/executive-payftse-100-2020

Standard Life Foundation | Payratios report December 2020 5

This executive summary highlights the key findings and recommendations from
research into the first round of FTSE 350 companies ‘pay ratio’ disclosures in
2019/20. More detailed analysis can be found in the main report.

The median CEO/median employee pay ratio across the FTSE 350 is 53:1 and the median CEO/lower
quartile employee ratio is 71:1. These ratios are significantly higher for the FTSE 100, where the median
CEO/median ratio is 73:1 and the median CEO/lower quartile ratio is 109:1.

Highest pay ratios 

The companies with the highest CEO/median and CEO/lower quartile employee ratios are shown
in tables 1 and 2. Comparisons between different companies should not be made without fully
understanding their respective business models – for example, differing reliance on indirectly employed
workers who are not included in the pay ratio calculations, can make the pay ratios of two ostensibly
similar companies look very different. Nonetheless, the highest ratios in the sample reveal strikingly wide
pay gaps between CEOs and their colleagues. This should prompt serious debate about the causes and
consequences of such differences.

Table 1: 10 highest CEO/median employee ratios

Company Index Industry CEO/median employee ratio
Ocado 100 Retail 2,605

JD Sports 100 Retail 310

Tesco 100 Retail 305

Watches of Switzerland 250 Retail 262

GVC Holdings 100 Travel & Leisure 229

Morrisons 100 Retail 217

CRH 100 Construction & Materials 207

WH Smith 250 Retail 207

Astra Zeneca 100 Health Care 190

Serco 250 Industrial Goods & Services 190

Key findings and recommendations

Standard Life Foundation | Pay ratio report December 2020 6

Table 2: 10 highest CEO/lower quartile employee ratios

Company Index Industry CEO/lower quartile employee ratio
Ocado 100 Retail 2,820

BP 100 Oil & Gas 543

Tesco 100 Retail 355

JD Sports 100 Retail 348

Watches of Switzerland 250 Retail 317

CRH 100 Construction & Materials 289

Astra Zeneca 100 Health Care 280

GVC Holdings 100 Travel & Leisure 278

Homeserve 100 Retail 278

Experian 100 Industrial Goods & Services 267

Industry analysis 

Even when excluding Ocado (an outlier with a CEO/median employee ratio of 2,605:1), the retail industry
has the highest average CEO/median employee ratio of 140:1. The industry with the lowest average CEO/
median employee ratio is financial services, with a ratio of 35:1. Overall, more labour intensive industries
tend to have higher ratios as they employ a larger number of workers on lower wages. The reverse is true
for capital intensive industries.

Figure 1: CEO/median employee pay ratios and
median pay thresholds by industry

0 0

20 10

40 20

60 30

80 40

100

Average CEO/median
employee ratio

Ba
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Average CEO/median employee ratio Average median pay threshold £000

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Standard Life Foundation | Pay ratio report December 2020 7

Trade union influence
The retail industry also provides an interesting case study regarding the influence of trade unions. At
companies in the industry where the pay-setting process involves union consultation and/or full collective
bargaining agreements, lower quartile thresholds did not fall below £18,000 and the average lower quartile
threshold was £18,856, whilst in companies without full collective bargaining coverage, some lower quartile
thresholds were below £15,000 and the average lower quartile threshold was £17,661. This is consistent
with wider research suggesting a link between collective bargaining agreements and higher pay.3

Company characteristics

Net sales, market capitalisation and number of employees (all proxies for the size of the company) all have
a positive relationship with pay ratio size.

Table 3: results of univariate test analysing the relationship between pay ratio
size and net sales, market capitalisation and number of employees

Firm-level economic
determinants

Companies where the CEO/median
employee ratio is greater than or equal
to the mean for the group

Companies where the CEO/median
employee ratio is less than the mean
for the group

Average net sales (£bn) 16.5 5.5

Average market
capitalisation (£bn) 25.8 7.6

Average number of
employees 46,553 19,888

Multivariate regressions also found that the two characteristics which determine pay ratio size were
indebtedness and complexity (where complexity is proxied by market-to-book ratio). It might be argued that
it is to be expected that a CEO in charge of a larger, more complex organization would expect to be paid
more for a more demanding role – equally, it could be said that this makes them more dependent on the
support of colleagues and structures than someone running a smaller, more agile organization.

3 Bryson A and Forth J, The added value of trade unions: New analyses for the TUC of the Workplace Employment
Relations Surveys 2004 and 2011, TUC, 2017

Standard Life Foundation | Pay ratio report December 2020 8

Pay for low earners 

The pay ratios also provide insights into pay of the lowest earning employees at some of the UK’s biggest
employers. The 10 companies with the lowest thresholds for pay at the lower quartile of the company’s pay
distribution were as follows:

Figure 2: 10 lowest lower quartile thresholds

Low pay is widespread across the companies in our sample:

• 36 companies – 18% of the sample – pay at least a quarter of their employees less than £20,000 a
year (on an FTE basis).

• Of these, 34 companies pay all lower quartile employees below the annualised equivalent of the
London Living Wage (£19,565), while 11 pay below the annualised equivalent of the Real Living
Wage (£16,926).4

As the pay ratio calculations do not include outsourced workers, who are often low-paid, we estimated the
gap between the CEO and a worker earning the living wage or minimum wage, (depending on whether the
company is living wage accredited). This results in even more extreme gaps between the lowest earners
and the CEO, with several CEOs making 500- or 600-times workers on the minimum or living wage.

Table 4: highest CEO/low-paid worker ratio

Company Index Industry Living/ minimum wage
(£)

CEO/low-paid
worker ratio

Ocado 100 Retail 14,942 3,930
Astra Zeneca 100 Health Care 16,926 847
BP 100 Oil and Gas 16,926 613

Experian 100 Industrial Goods & Services 16,926 608

Royal Dutch Shell 100 Oil and Gas 14,942 585

DunelmFTSE 100
FTSE 250

16,409

William Hill 16,268

Domino’s Pizza 16,264

JD Sports 16,067

Telecom Plus 15,632

Wetherspoons 14,760

Homeserve 14,493

Lower quartile threshold (£)

WHSmith 14,276

Associated British Foods 14,175

Mitchells and Butlers 14,014

4 Calculations based on a 35-hour week at rates of £10.75 (London Living Wage) and £9.30 (Real Living Wage). The real living
wage is a voluntary accreditation set by the Living Wage Foundation, based on their calculation of what is necessary to secure
a decent standard of living. It should not be confused with the statutory minimum wage.

Standard Life Foundation | Pay ratio report December 2020 9

The potential to redistribute 

The pay ratios also provide useful insights into the potential to raise incomes and living standards by
reallocating companies’ expenditure on the pay of high earners to those in the middle and at the bottom.

For example, a CEO pay award of £5m (there are 23 in our sample who earn at least this amount) equates
to the equivalent cost of 295 workers earning the 2019/20 UK real living wage for a year. £5 million could
raise the pay of 2,520 minimum wage workers to the real living wage.

On average, a 3% distribution of pay from an earner at the median upper quartile threshold for the
companies in our sample (£59,133) would represent £1,774 per lower quartile employee – a significant
sum of money for those earning below the median lower quartile threshold of (£28,395). Indeed, as those
in the upper quartile earn above the upper quartile threshold, and those in the lower quartile earn below
the lower quartile threshold, these figures understate the typical potential to redistribute and benefit low
income workers.

However, there is enormous variation by company. At the companies with the lowest-paid lower quartile
employees, the upper quartile are also not highly-paid, while at the companies with the highest-earning
upper quartile workers, those in the lower quartile are not low-paid.

Table 5: Companies with the 5 lowest lower quartile thresholds and
5 highest upper quartile thresholds

5 companies with lowest lower
quartile thresholds

Industry Lower quartile
threshold (£)

Upper quartile
threshold (£)

Mitchells and Butlers Travel & Leisure 14,014 15,881
Associated British Foods Consumer Goods 14,175 24,026
WHSmith Retail 14,276 17,034
Homeserve Retail 14,493 32,232
Wetherspoons Travel & Leisure 14,760 27,333
5 companies with highest
upper quartile thresholds

Industry Lower quartile
threshold (£)

Upper quartile
threshold (£)

TP ICAP Financial Services 57,064 230,554
Man Group Financial Services 83,084 227,235
Standard Chartered Banks 83,000 212,000
Tate & Lyle Consumer Goods 46,064 201,522
British American Tobacco Consumer Goods 46,216 183,179

There would be considerable interest in understanding the potential to raise pay for low- and middle-
income workers by redistributing from those at the very top – the people above the top 1% of the UK
earnings distribution, who could afford to give up a significant quantity of their pay and remain well-paid
even in comparison to above-average earners. However, data in quartiles does not provide sufficient
granularity to do this. For the majority of companies, employees at the upper quartile thresholds are not
what most people would consider to be exceptionally rich.

Narrative reporting 

Companies are required to provide a narrative accompanying their pay ratio disclosure, however, these
were generally insubstantial. Several companies provided minimal or no narrative. Those that did mostly
failed to engage with the question of what actions they might take on pay distribution going forward, or how
they engaged their workforce in the pay-setting process.

Standard Life Foundation | Pay ratio report December 2020 10

Conclusions and recommendations

It is important to emphasise the value of pay ratio reporting: it can be an important tool for stakeholders,
including workers, to hold companies to account – provided it is not used to make sweeping judgements
or definitive conclusions, but as a starting point for discussions around pay and employment practices.
Indeed, companies themselves can use the process for assessing their corporate culture and the value they
deliver for their stakeholders.

The disclosures provide useful benchmarks for pay levels and pay distribution across companies. The
scale of the inequality and the extent of low pay at some of the UK’s largest employers that they expose
is critically important, and needs to be widely debated. However, there are also some limitations to the
disclosures, chiefly:

• The exclusion of indirectly employed workers potentially distorts the ratios and renders
comparisons more difficult.

• The exclusion of major employers beyond UK-listed companies means the disclosures provide a
limited picture of UK employment practices.

• The lack of information on top earners beyond the CEO makes it harder to assess the potential to
raise pay for low- and middle- earners by re-balancing pay distributions.

We have made recommendations for how the pay ratios disclosures could be improved: these can
be understood both as policy recommendations for when the government next reviews the pay ratio
disclosures, and as changes that stakeholders can encourage companies to make voluntarily:

• Companies should provide more granular information on the earnings of those between the upper
quartile threshold and the CEO.

• Outsourced workers should be included in the pay ratio calculations.

• There should be higher standards and clearer expectations of narrative reporting.

• Companies should directly provide information on pay ratios to their workers.

• Companies should provide data on their number of UK employees.

We also propose accompanying recommendations that would complement the pay ratio disclosures, and
ensure that the information they provide is used to improve low- and middle-income workers’ pay and
working conditions:

• Allow trade union access to workplaces, to inform workers of the benefits of collective bargaining.

• Establish sectoral governance bodies to monitor fair pay.

• Legislate for worker representation on company boards.

• Require companies to introduce all-employee profit sharing or share ownership schemes.

• Amend company law to give the interests of all stakeholders equal importance, rather than elevating
shareholder interests above those of others.

• Make the shareholder vote on directors’ remuneration reports legally binding.

• Require companies to include guidance on potential future pay ratio sizes in their remuneration
policies so that shareholders can vote on this.

• Apply the pay ratio disclosure requirements to all large employers.

Taken together, these measures would boost transparency, governance and accountability to stakeholders
at the UK’s biggest businesses, while strengthening the bargaining power of low- and middle-income
workers, and significantly improving living standards.

Standard Life Foundation | Payratios report December 2020 11

This introductory section explains the background to the pay ratio disclosures
and the parameters for this report. It discusses how the pay ratio disclosures
might be used by different stakeholder groups.

Introduction

This report analyses the first set of pay ratio disclosures made by FTSE 350 companies, in order to identify
what insights the pay ratios provide and how they might be used by stakeholders.

In addition to examining the ratios between the CEO and their median, upper quartile and lower quartile
employees, the analysis reviews data on the lower quartile pay thresholds in order to gain insights into
the earnings of the lowest-paid employees at the UK’s biggest listed companies. We also look at the
pay differences between the upper and lower quartiles (on the basis of pay levels at the 75th and 25th
percentiles).

The report is an updated version of an interim study, published in June 2020, analysing the very first pay
ratio disclosures from 1 January to 30 April 2020.

The interim report identified initial insights from the disclosures. This final report, covering disclosures by
201 companies (over 90% of the FTSE 350 companies required to report their pay ratio, as of November
30 2020) is able to make more concrete observations on what pay ratio reporting tells us about pay,
employment practices and corporate cultures at some of the UK’s largest private sector employers. It also
makes recommendations for how the disclosures could be improved and how they can best be used.

We intend to repeat the analysis in future years, using the pay ratio disclosures to build a data set that
can enhance our understanding of UK corporate pay distribution and its socio-economic impact on an
ongoing basis.

Using the analysis

This is only the first year of pay ratio reporting, and given the variable nature of CEO pay awards, more
years of data will allow us to build a clearer picture of corporate pay practices.

Nonetheless, this analysis gives an initial snapshot of trends in pay ratio sizes, shows how firms are
approaching pay ratio reporting, and provides data that can be used to inform debates about pay and
work. It also identifies the limitations of the disclosures and recommends areas for improvement, with
regard to both the regulations themselves and their application.

High Pay Centre analysis of 2020 pay ratio disclosures:
final report

Standard Life Foundation | Pay ratio report December 2020 12

In particular, we hope that the research will be of some value to a number of stakeholders, including the
following groups:

• The workers themselves, who can potentially benefit from better information about how their
pay levels compare to others within their own company or in other similar organisations.

• Businesses, particularly the remuneration committees that oversee pay-setting processes and
the directors or committees responsible for stakeholder representation in corporate governance
structures as mandated by the 2018 Corporate Governance Code. Businesses can use the
pay ratio data to inform their thinking on how to achieve the fairest balance of pay distribution
across their workforces.

• Investors seeking to understand the employment practices and corporate cultures of the
companies they invest in, and how their spending on pay – a significant cost for any business –
is distributed.

• Trade unions, who can use information on pay levels to support the case for fairer wages for the
workers they represent.

• Policymakers interested in the initial impact of the pay ratio disclosures, and their insights
and limitations. Following the outbreak of COVID-19 and the consequent reliance of many
businesses on government support, details of the distribution of companies’ pay costs may also
be relevant to decisions regarding support packages.

• Academic and commercial researchers interested in prevailing corporate pay practices, who
can use the data to examine how pay distribution relates to issues such as industry type,
business performance or societal impact.

We have engaged with businesses, investors, trade unions and policymakers in order to discuss how
they can make the best use of the data and the insights it provides. We hope the research will assist
these stakeholders in their work shaping the pay and employment practices of the UK’s largest private
sector employers.

Standard Life Foundation | Payratios report December 2020 13

01

In this section we show the wide range of pay ratio sizes across the companies
that have disclosed.

Median pay ratios

The ratio sizes at individual companies vary widely from the median. The pay ratio disclosures mean that
we can identify the widest pay differentials across UK-listed companies. Tables 1-4 detail the companies
with the highest and lowest CEO/median employee and CEO/lower quartile employee pay ratios. This
updated list shows even wider pay gaps than those presented in the interim report.

Table 1: 10 highest CEO/median employee ratios

Company Index Industry CEO/median employee ratio
Ocado 100 Retail 2,605
JD Sports 100 Retail 310
Tesco 100 Retail 305
Watches of Switzerland 250 Retail 262
GVC Holdings 100 Travel & Leisure 229
Morrisons 100 Retail 217
CRH 100 Construction & Materials 207
WH Smith 250 Retail 207
Astra Zeneca 100 Health Care 190
Serco 250 Industrial Goods & Services 190

Ocado is a huge outlier here: its median ratio of 2,605: 1 is due to the unusually large pay package of
over £58 million handed to Ocado’s CEO. This was a one-off pay award: a growth incentive plan (GIP)
worth £54 million constituted the overwhelming majority of the pay package. In the previous year, the
Ocado CEO was paid £4 million.

Highest and lowest pay ratios

Standard Life Foundation | Pay ratio report December 2020 14

Table 2: 10 highest CEO/lower quartile employee ratios

Company Index Industry CEO/lower quartile employee ratio
Ocado 100 Retail 2,820
BP 100 Oil & Gas 543
Tesco 100 Retail 355
JD Sports 100 Retail 348
Watches of Switzerland 250 Retail 317
CRH 100 Construction & Materials 289
Astra Zeneca 100 Health Care 280
GVC Holdings 100 Travel & Leisure 278
Homeserve 100 Retail 278
Experian 100 Industrial Goods & Services 267

Tables 1 and 2 demonstrate the importance of industry in influencing pay ratio size: the retail industry
dominates the companies with the highest ratios. Retail companies employ more low-paid staff than
most other industries. There are also several large retailers in the tables whose size is potentially a
significant factor driving their high CEO pay.

Table 3: 10 lowest CEO/median employee ratios

Company Index Industry CEO/median employee ratio
Sanne Group 250 Financial Services 8
XP Power 250 Industrial Goods & Services 10
Hiscox 250 Insurance 11
PZ Cussons 250 Consumer Goods 13
Petrofac 250 Oil & Gas 14
Integrafin 250 Financial Services 15
Kainos 250 Technology 15
Victrex 250 Basic Materials 16
Renishaw 250 Industrial Goods & Services 17
CMC 250 Financial Services 17

Comparing tables 1 and 3 shows the huge variation in median pay ratio sizes across the disclosures, with
the highest ratios being 200-300: 1 and the lowest being 10-20: 1.

Standard Life Foundation | Pay ratio report December 2020 15

Table 4: 10 lowest CEO/lower quartile employee ratios

Company Index Industry CEO/lower quartile employee ratio
Sanne Group 250 Financial Services 13
XP Power 250 Industrial Goods & Services 16
Victrex 250 Basic Materials 18
Integrafin 250 Financial Services 18
Hiscox 250 Insurance 19
PZ Cussons 250 Consumer Goods 19
Petrofac 250 Oil & Gas 20
Renishaw 250 Industrial Goods & Services 22
Kainos 250 Technology 22
Persimmon 100 Consumer Goods 23

As noted in the interim report, these tables demonstrate the importance of company size in influencing
pay gaps: those with higher ratios are mainly from the FTSE 100 index, whilst most of those with the
lowest ratios are FTSE 250 companies.

Potential future pay ratio sizes

It is also possible to estimate pay ratios for the coming year, using statements about expected executive
remuneration in companies’ annual reports.

The reports indicate the level of pay the CEO will receive if they meet (but do not exceed) their targets:
this can be used to calculate the company’s pay ratio ‘target’ value for the next financial year, using the
workforce pay levels recorded in the pay ratio disclosures for the current financial year as the comparator
with the CEO’s expected pay.

Analysis of these statements suggests that the ratios disclosed in 2021 will not significantly differ from
those in 2020, and that the industry trends we have seen so far will remain consistent, without significant
pay increases for the workforce.

The analysis found that for the FTSE 350, the median CEO/median employee pay ratio target value
is 55:1, slightly higher than the median CEO/median employee pay ratio for the 53:1 FTSE 350 this
year. The industry trends we identify in section 2 are also maintained in the pay ratio target values. For
example, in the retail sector, the potential average pay ratio target value for next year remained high at
114:1, whilst the potential average pay ratio target value for financial services remained low at 37:1.

It will be interesting to compare the actual pay ratios reported in 2021 to these projections. The impact
of the Covid-19 pandemic may mean that CEO performance targets are not met and that pay awards
are lower. Several CEOs have made salary cuts or have forgone bonuses in response to the economic
shutdown, and Long-Term Incentive Plans may also vest at lower levels if company performance has
suffered.1 On the other hand, many companies have furloughed workers on reduced pay, which could
potentially widen ratios.

1 High Pay Centre, Corporate Response to the Economic Shutdown, 2020 via
https://highpaycentre.org/wp-content/uploads/2020/08/report_copy

Standard Life Foundation | Pay ratio report December 2020 16

Limitations of the disclosures

It is important that sweeping judgements are not made on the basis of the pay ratio disclosures alone,
and that they are used as the starting point rather than the last word of a debate about corporate
employment practices and pay distributions.

There is a temptation to assume that those companies with low ratios are necessarily examples of ‘better
practice’. However, it is important to also examine factors behind the ratios. In section 2 we discuss the
complexities of the characteristics that influence the ratio sizes.

The one-off nature of some CEO awards, such as Ocado’s £58m pay package, means that the snapshot
of individual companies pay ratios may be misleading. We will get a more consistent picture when we
have a few years of disclosures to analyse and can compare both pay ratios in a particular year, as well
as company averages over a multi-year period.

Different employment models and the use of outsourced workers also complicate inter-company
comparisons.

The extent to which many UK companies rely on indirectly employed workers and the implications of
their exclusion from pay ratio calculations is discussed further in section 4 of the report. The oil industry
provides one of the most obvious examples of how this can distort comparisons between ostensibly
similar companies, if undertaken without contextual understanding of their wider employment models.

BP and Shell, two major FTSE 100 oil companies with similarly high CEO pay levels, have very different
ratio sizes: BP has a CEO/lower quartile employee ratio of 543:1 whereas Shell’s is 147:1. This is because
Shell franchises its petrol stations, meaning that low-paid retail staff working at petrol stations are not
included in its pay ratio calculations, whereas BP retail workers are directly employed and included in the
calculation. As such, Shell’s lower quartile threshold is £59,419 whilst BP’s is £19,108.

Table 5: A comparison of BP’s and Shell’s pay ratios

Company Index CEO pay
(£m)

Lower quartile
ratio

Median
ratio

Lower quartile
pay threshold (£)

Median
threshold (£)

BP 100 10.4 543 188 19,108 55,071
Royal Dutch
Shell

100 8.7 147 87 59,419 100,755

Standard Life Foundation | Pay ratio report December 2020 17

Pay ratios and inequality

However, even accounting for these issues, the ratios identified in this section convey useful information
and raise important questions.

The widest ratios show individuals making 100, 200 or even 500 times many of their colleagues. These
are stark findings, regardless of whether or not the ratios identified really are the widest in the UK. Indeed,
if different employment models obscure a higher number of companies with ratios of this size then the
issue becomes even more important.

From a business perspective, there is an extensive academic and commercial research literature over
how much of the variance in firm performance can be attributed to an individual CEO.2 By highlighting the
scale of the gap between CEOs and their colleagues, research can inform discussion of whether or not
this fairly reflects their economic value.

Similarly, there are also important moral questions around the scale of inequality cited in this section,
and concerns about the impact that it might have on social cohesion, and on employee morale and
workplace relationships.3

Again, by highlighting the most extreme intra-company pay differences, the pay ratio disclosures will
raise the profile of these issues and inform and encourage discussion of pay inequality.

2 See e.g. Fitza M A, How much do CEOs really matter? Reaffirming that the CEO effect is mostly due to chance, 2017,
Strategic Management Journal, 38(3), 802-811.

3 Notably, voters in San Francisco recently approved a ballot measure to impose an extra tax on companies that pay their CEO
over 100 times more than their median employee.

Standard Life Foundation | Payratios report December 2020 18

Pay ratios by industry02

This section looks at average pay ratios across industries and sectors,
discussing factors that potentially shape the ratios within different industries.

Pay ratios across industries

A company’s industry or sector is likely to have a significant impact on the size of its pay ratio. Analysing
the pay ratios across different industries and sectors can help to identify certain trends. However, it should
again be reiterated that companies should not be judged solely on the basis of comparisons between their
pay ratio and the industry average – and that it is important for stakeholders to understand the company’s
individual context before making a judgement on whether its balance of pay is fair or proportionate.

Figure 1 shows the average CEO/median employee pay ratio and the average pay threshold for median
earners across different industries (Ocado has been excluded from the data given that it is such an outlier).4

Figure 1: CEO/median employee pay ratios and median pay
thresholds by industry

To date, the retail industry has the highest average CEO/median ratio: excluding Ocado, this is 140:1,
and including Ocado it is 276:1.

Table 5 shows Ocado and the 5 other retail companies with the highest median ratios. Note that the
lower quartile thresholds are full-time equivalent.

4 We have used the Industry Classification Benchmark Rules which can be found here: https://research.ftserussell.com/
products/downloads/ICB_Rules . A mixture of industries and supersectors have been used, depending on the number of
companies in each classification

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Standard Life Foundation | Pay ratio report December 2020 19

Table 6: highest CEO/median pay ratios in the retail industry

Company Index CEO pay
(£m)

Lower quartile
ratio

Median
ratio

Lower quartile
pay threshold (£)

Median
threshold (£)

Ocado 100 58.7 2,820 2,605 20,800 22,500
JD Sports 100 5.6 348 310 16,067 18,299
Tesco 100 6.4 355 305 18,086 21,057
Watches of
Switzerland

250 6.5 317 262 20,500 24,900

Morrisons 100 4.2 230 217 18,202 19,340
WH Smith 250 3.4 239 207 14,276 16,502

Pay ratios are, of course, determined both by levels of pay for the company’s UK employees and levels of
pay for their CEO. As we noted in the previous section, high CEO pay is a big factor in the size of the ratios
at certain major retail companies. However, what is really distinctive about the retail industry is that it has
by far the lowest median employee pay of all industries, averaging £20,574. As Table 5 shows, some of the
lower quartile thresholds in the retail industry are extremely low: for example, WH Smith’s lower quartile
threshold is £14,276. Low pay is discussed further in section 4 of the report.

The financial services industry has the lowest average CEO/median ratio. This is a capital-intensive
industry with relatively few employees who are often in highly-paid analytical or specialist roles. Thus, the
low ratios are predominantly due to the type of work involved in the sector and the type of employees
recruited – though as shown in Table 6, some of the lowest ratios are also due to low CEO pay.

Table 7: lowest CEO/median employee ratios in the financial services industry

Company Index CEO pay
(£m)

Lower quartile
ratio

Median
ratio

Lower quartile
pay threshold (£)

Median
threshold (£)

Sanne Group 250 0.3 13 8 33,128 53,614
Integrafin 250 0.8 18 15 41,722 50,067
Man Group 250 2.2 26 17 83,084 126,740
CMC 250 1.0 26 17 40,300 62,600
Investec 250 1.3 34 18 38,784 72,337

The effect of union influence on pay ratio size

Trade union presence within a company is a potential influence on the size of pay ratios.

The retail industry provides an example of the differences between companies with and without collective
bargaining. For 5 of the 18 retail companies in our sample, pay across the workforce is determined by
collective bargaining agreement or by significant consultation with unions: these are Greggs, Morrisons,
Ocado, Sainsbury’s and Tesco.5 All of these companies have lower quartile thresholds above £18,000, and
the average lower quartile threshold for these five companies is £18,856.

For the remaining 13 companies, the lowest lower quartile thresholds are below £15,000, and the average
lower quartile threshold is £17,661.6 An average difference of over £1,000 is substantial at these low levels
of pay, and this suggests that when unions have collective bargaining rights at a particular company, this
makes a significant difference to the pay of lower paid workers.
5 Information provided by the USDAW trade union.
6 Two of these companies, B&M European Retail and Next, have collective bargaining but only for their distribution sides.

Standard Life Foundation | Pay ratio report December 2020 20

This analysis is consistent with wider research showing the relationship between collective bargaining
and higher workforce pay across the UK as a whole. A 2017 study found that ‘staff at workplaces where
unions were recognised for collective bargaining were paid 5.3% more than staff at comparable workplaces
without collective bargaining’.7

However, collective bargaining does not seem to have contained CEO pay at the retail companies
examined. Ocado, Morrisons and Tesco are all in our list of the companies with the top 10 CEO/median
employee ratios shown in Table 1. This is understandable given that pay across the workforce tends to be
set by different mechanisms to executive pay.8

Nonetheless, addressing this question from a sectoral perspective suggests that there may be some
relationship between lower CEO pay and collective bargaining. The Aerospace and Defence sector tends to
have high levels of union membership, with the majority of companies negotiating with unions on pay. The
table below shows that ratios in the sector are relatively low, though not consistently low across the board:
the two FTSE 100 companies in the group have higher CEO pay and higher ratios.

Table 8: pay ratios in the aerospace and defence industry

Company Index CEO pay
(£m)

Lower quartile
ratio

Median
ratio

Lower quartile
pay threshold (£)

Median
threshold (£)

Babcock 250 1.4 47 37 29,200 37,600
Ultra
Electronics

250 1.6 54 37 29,549 43,151

Meggitt 250 2.5 76 58 32,879 42,861
Qinetic 250 2.0 56 41 35,732 48,965
BAE Systems 100 3.9 90 72 43,873 54,833
Rolls Royce 100 3.2 66 56 48,000 56,000

The possibility of a relationship between lower pay ratios and higher trade union membership is
supported by the fact that at the national level, there is a strong link between lower economic inequality
and higher trade union membership or collective bargaining coverage – the richest 1% tend to take
a much higher share of total incomes in countries with lower union membership and/or collective
bargaining coverage.9 In the UK, the share of incomes going to the top 1% has risen over the past forty
years in tandem with the fall in trade union membership.10

It is also the case that unions are well placed to use these disclosures to push for fairer pay distribution,
so it is possible that industries in which unions are influential might see ratios getting smaller now that
this information is available.

As more pay ratio disclosures are published in the coming years, the potential evidence base for research
into the role that unions play in counteracting pay inequality will grow.

7 Bryson A and Forth J, The added value of trade unions: New analyses for the TUC of the Workplace Employment Relations
Surveys 2004 and 2011, TUC, 2017 via https://www.tuc.org.uk/sites/default/files/1%20WERS%20lit%20review%20new%20
format%20%20RS_0

8 This has been the case since the early 1980s, prior to which pay for both employees and executives was set with reference to
internal pay grades. This is discussed in Willman P & Pepper A, The role played by large firms in generating income inequality:
UK FTSE 100 pay practices in the late twentieth and early twenty-first centuries, Economy and Society, 2020

9 IPPR, Fall in trade union membership linked to rising share of income going to top 1%, 2018 via https://www.ippr.org/news-
and-media/press-releases/fall-in-trade-union-membership-linked-to-rising-share-of-income-going-to-top-1

10 Social Europe, Collective bargaining and rising inequalities: do the IMF and OECD get it?, 2016 via https://www.socialeurope.
eu/collective-bargaining-rising-inequalities-oecd-imf-get

Standard Life Foundation | Payratios report December 2020 21

04 Company characteristics03

This section details external research commissioned by the High Pay Centre
aimed at understanding which company characteristics are drivers and/or
predictors of pay ratio size.

Which company characteristics drive pay ratios?

In order to supplement our own analysis of the pay ratio disclosures, The High Pay Centre carried out
research in partnership with Dr Aditi Gupta at Kings’ Business School, Kings’ College London, and Steve
Glenn, Head of Executive Remuneration Research at E-Reward, to analyse the impact of specific company
characteristics on pay ratio size.11

Pay ratios and company size

Dr Gupta’s analysis found that market capitalisation, net sales and employee numbers all had a very
significant positive correlation with pay ratio size (see Table 9). These characteristics are all proxies for
company size.

Table 9: results of univariate test analysing the relationship between pay ratio
size and net sales, market capitalisation and number of employees

Firm-level economic
determinants

Companies where the CEO/median
employee ratio is greater than or equal
to the mean for the group

Companies where the CEO/median
employee ratio is less than the mean
for the group

Average net sales (£bn) 16.5 5.5

Average market
capitalisation (£bn) 25.8 7.6

Average number of
employees 46,553 19,888

Pay ratios and company complexity

More sophisticated tests controlling for multiple variables found that only two characteristics were
highly significant in determining pay ratios: these were firm risk (proxied by firm debt) and firm
complexity (proxied by market-to-book ratio). Higher debt and a higher market-to-book ratio were
related to higher ratios12. This indicates that CEOs are being paid more in companies that are more
indebted and more complex.

11 Details of the methodologies used for this research can be found in Appendix A.
12 The market-to-book ratio evaluates a company’s market value relative to its book value. The ‘market’ value is the current price

of all shares, whilst the book value is the current cost of the company’s assets minus the cost of its liabilities.

Standard Life Foundation | Pay ratio report December 2020 22

It is not immediately clear why indebtedness might bring about a higher ratio. However, there is evidence
to suggest that firms use indebtedness in order to claim that they are unable to pay workers more. One
US study finds that firms under threat of unionisation tend to take on more debt in order to reduce the
funds that are available on its balance sheet.13 The potential connection between lower workforce pay
and greater company indebtedness is one possible explanation for the connection between higher
leverage and higher pay ratios.

Pay ratios and performance

One might expect that CEO pay, and therefore pay ratio size, would correlate with firm performance,
since most CEO pay packages have a substantial performance-related element that is pegged to
financial metrics. However, this was not borne out by the results.

Our analysis examined the relationship between pay ratio size and 3-year share price change data (since
Long-Term Incentive Plans for CEO pay packages are commonly set with reference to a 3-year time
period), finding a weak relationship between the two variables for the FTSE 350 with an R-Squared value
of 0.0071. There was a slightly stronger correlation between the two variables for the FTSE 100, with an
R-Squared value of 0.1134.

Further research on the relationship between performance and pay ratios found that neither 1-year share
returns nor 5-year return on assets had a significant positive relationship with pay ratios. A separate
univariate test looking at the relationship between proxies for performance and CEO pay also failed to
find a significant positive correlation. This suggests that good performance does not necessarily result
in higher pay for the CEO and therefore in larger ratios, and likewise that bad performance does not
necessarily result in lower pay for the CEO.

There are two important caveats with this analysis. Firstly, most of the company characteristics being
examined affect predominantly the CEO pay aspect of the ratio and not the workforce pay aspect.
Market capitalisation, net sales and firm performance fall under this category. Potential exceptions to this
are indebtedness, as discussed, and employee numbers: research on pay ratios in the US has found that
a higher employee count is correlated with lower median pay.14 Nonetheless, most of these results are
telling us about what drives CEO pay levels rather than the ratio sizes themselves.

Secondly, our sample size of just under 200 companies is small, and regressions are usually done with
a much bigger sample, so these findings should be interpreted with some caution. We are planning to
continue research on this, and the results will become more reliable once we have several years of data
to work with. It is worth noting, however, that research analysing the pay ratio disclosures in the US,
which came into force in 2018, has found similar results: in this US analysis, pay ratio size correlated
closely with both market capitalisation and employee numbers, and there was no correlation between
pay ratio size and firm performance.15

13 Bronars S and Deere D, The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth, The
Quarterly Journal of Economics, 106: 1, 1991, via http://www.jstor.org/stable/2937914

14 Burney B, What does the CEO pay ratio data say about pay? 2018 via https://corpgov.law.harvard.edu/2018/09/04/what-
does-the-ceo-pay-ratio-data-say-about-pay/

15 See Lifshey D, The CEO Pay Ratio: Data and Perspectives from the 2018 Proxy Season, 2018 via https://corpgov.law.harvard.
edu/2018/10/14/the-ceo-pay-ratio-data-and-perspectives-from-the-2018-proxy-season/

Standard Life Foundation | Pay ratio report December 2020 23

Are pay ratio sizes justified?

Beyond simply looking at which factors determine or correlate with pay ratio size, we need to ask
whether it is justifiable for pay ratio size to be affected by certain factors.

For example, it appears to be standard practice that larger companies reward their CEOs more highly
and have larger pay ratios as a result. It is true that at companies that have a higher market capitalisation,
decisions taken by the CEO will have a greater financial value. However as we have previously noted,
the economic importance and impact of executives on company performance, and whether or not this
justifies such vast pay gaps, continues to be extensively debated by researchers.16

In the case of companies with a larger number of employees (with more levels between the CEO and the
median worker), there will be more extensive supply chains, and involvement in a wider range of markets,
all adding to the complexity of the CEO’s role.

At the same time, however, a larger company also makes the CEO more dependent on their colleagues.
It is arguably impossible for a single individual or executive team to maintain oversight of an organisation
with extensive operations and supply chains spanning multiple continents, time zones and regulatory
regimes. As Sir Philip Hampton, former Chair of GSK and RBS, said in a research interview for a previous
High Pay Centre publication,

“the bigger the system,the more it’s the system that counts rather than the
person on top of it”.17

16 See e.g. Li W & Young S, An analysis of CEO pay arrangements and value creation for FTSE-350 companies, 2016, CFA
Society of the United Kingdom, 2.

17 High Pay Centre, Made to measure: How opinion about performance becomes fact, 2015 via http://highpaycentre.org/files/
FINAL_MADE_TO_MEASURE

Standard Life Foundation | Payratios report December 2020 24

Pay for low earners04

This section examines absolute pay levels at the lower quartile threshold,
highlighting the companies with the lowest paid lower quartile employees in
the sample and discussing the implications. It also looks at the possible impact
of outsourcing on pay ratios, and calculates ratios that show the gap between
CEO pay and the annualised national minimum or real living wage (dependent
on whether the company in question is an accredited living wage employer).

Though the pay ratio reporting requirements were driven by concern about CEO pay levels relative to the
wider workforce, it is arguably the disclosure of absolute pay at the lower quartile of their pay distribution
that is the most interesting aspect of the disclosures. Ensuring everyone has a decent standard of living
should be one of the foremost priorities for any society. In this respect, what the lowest-paid employees
at some of the UK’s largest employers earn is of considerable importance.

The median lower quartile threshold for the companies in our sample is £28,395. This figure seems
high, and is not far below the median gross annual earnings for full-time workers in the UK of £30,353.18
However, it is worth noting that the figure refers to total employee remuneration, rather than just wages or
salaries: it includes taxable benefits, pensions and any share-based pay or cash bonuses. Furthermore,
as the figures below show, it masks considerable variation across different companies.

It is also very important to emphasise that this is the lower quartile threshold. That means that 25% of
employees at these companies are earning less than this. Accordingly, the disclosures do not show what
the lowest-paid employees are earning. Furthermore, indirectly employed workers, who very often carry
out low-paid roles (security guards or cleaners maintaining a firm’s offices, for example) are not included
in the sample.

Lowest-paying companies

Figure 2 shows the companies with the lowest levels for the lower quartile pay threshold.

As might be expected, the companies in this table are mostly from sectors such as retail and travel and
leisure, which are labour-intensive companies with a large proportion of low-paid roles. They are also both
sectors that employ large proportions of under-25s, to whom the national living wage rate does not apply.

In our interim report, the lowest levels for the lower quartile threshold were around £16-17,000. With
this extended set of disclosures, the picture has worsened considerably. The lowest thresholds for
lower quartile earners at FTSE 350 companies are strikingly low, with the lowest-paying five companies
all paying at least a quarter of their employees below £15,000, while 36 companies – 18% of the total
sample – pay the lower quartile less than £20,000.

18 Office for National Statistics, Annual Survey of Hours and Earnings, 20 October 2019

Standard Life Foundation | Pay ratio report December 2020 25

The UK real living wage, calculated by the Living Wage Foundation, as the minimum hourly rate on which
the recipient is able to cover their living expenses and live a healthy lifestyle, was £9.30 an hour across
the UK and £10.75 in London up until November 2020. Based on a 35-hour week, the 2019/20 UK rate
equated to £16,926 per annum and the London rate to £19,565 per annum.

All of the companies in this figure are below the annualised Living Wage, and certainly well below
the London Living Wage. This is despite the fact that the disclosures include pensions whilst the
Living Wage does not. Amongst the disclosures as a whole, 34 companies lower quartile thresholds
below the annualised equivalent of the Real Living Wage for London, including 11 below the national
Real Living Wage.19

It is worth re-stating that a quarter of employees at each company earn less than the lower quartile
threshold while, as we discuss in the next section, the exclusion of indirectly employed workers from the
pay ratio calculations means that the thresholds may be artificially high in many cases. So even these stark
findings potentially understate the extent of low pay at some of the UK’s biggest companies.

DunelmFTSE 100
FTSE 250

16,409

William Hill 16,268

Domino’s Pizza 16,264

JD Sports 16,067

Telecom Plus 15,632

Wetherspoons 14,760

Homeserve 14,493

Lower quartile threshold (£)

WHSmith 14,276

Associated British Foods 14,175

Mitchells and Butlers 14,014

19 On the same basis that we have annualised the real living wage, an annualised equivalent of the statutory minimum wage for
over 25s would be £14,492 – however there is no suggestion that any companies in our sample, including the three with lower
quartile thresholds below this amount, have breached the minimum wage requirements. Factors that could potentially drive
pay levels below an annualised minimum wage equivalent include the employment of large numbers of workers below the age
of 25, and the use of the Coronavirus Job Retention Scheme, whereby workers receive only 80% of their pay.

Figure 2: 10 lowest lower quartile thresholds

Standard Life Foundation | Pay ratio report December 2020 26

Box 1: Compliance with the pay ratio reporting

The Companies (Miscellaneous Reporting) Regulations 2018 state that companies must disclose the
total remuneration of employees at the lower quartile, median and upper quartile mark, as well as the
salary component of this remuneration.20

Not all companies have complied: Biffa, Centrica, Electrcomponents, Homeserve, Ibstock, Imperial
Brands, Pets at Home, Rentokil, TalkTalk, Telecom Plus and Wetherspoons all failed to disclose the pay
levels of employees at the three required points of the pay distribution, publishing only the ratio to CEO
pay. Just Eat did not disclose workforce remuneration levels or the pay ratios.

Homeserve, Telecom Plus and Wetherspoons are all amongst the ten companies with the lowest lower
quartile thresholds. Biffa, Ibstock and Pets at Home also have lower quartile thresholds under £20,000.
It may be the case that the companies in question did not disclose their absolute pay thresholds in
order to avoid attention being drawn to their high proportion of low-paid employees.

For the purposes of our analysis, companies’ failure to disclose thresholds is not a problem as we can
calculate the thresholds by dividing the declared figure for CEO pay by the declared ratio. However, the
principle of companies with potentially noteworthy pay practices disregarding reporting requirements
on the subject is concerning.

Highest lower quartile thresholds

However, just as there are a strikingly large number of companies with very high numbers of low paid
employees, the median lower quartile pay threshold of £28,395 reflects the fact that there are a number of
companies in the sample where even those employees at the lower quartile are well paid by the standards
of the wider UK economy.

Figure 3: 10 highest lower quartile thresholds

Lower quartile threshold (£)

FTSE 100
FTSE 250

Schroders 55,400

Beazley 52,500

TP ICAP 57,064

IG Group 55,790

Jupiter Fund Management 65,000

Royal Dutch Shell 59,419

London Stock Exchange 79,292

Prudential 77,000

Man Group 83,084

Standard Chatered 83,000

20 The Companies (Miscellaneous Reporting) Regulations 2018, Paragraph 19F, via
https://www.legislation.gov.uk/ukdsi/2018/9780111170298/pdfs/ukdsi_9780111170298_en

Standard Life Foundation | Pay ratio report December 2020 27

Almost all of the companies highlighted in figure 3 are financial services or insurance companies which
employ a small number of very highly-paid staff. However, the disclosures do not include outsourced
workers. It is probable that many of these companies have low-paid workers such as cleaners or caterers
who have permanent employment on the company in question’s premises, doing work commissioned by
the company, but are indirectly employed and are not included in the pay ratio calculations. This means that
their lower quartile thresholds appear much higher than they would be were these workers included.

Highest to lowest paid workers

The exclusion of indirectly employed workers – coupled with the lack of data on pay for employees below
the lower quartile threshold – is a weakness of the disclosures.

Many commonly outsourced roles are in low-paid occupations, so their omission will have a significant
impact on the recorded pay ratio in many cases. Box 2 highlights their prevalence and the extent to which
many leading companies rely on them.

Box 2: Workers excluded from the pay ratio calculation

As we have noted throughout the report, the pay ratio calculations do not include certain types of
worker who many people would understand to be working for a particular company. We have highlight-
ed how Shell, for example, uses a franchise model for its petrol stations, meaning that their staff are
employed by the franchisee rather than Shell, even though they work in Shell-branded outlets. Other
companies such as Intercontinental Hotels and Dominos also use a franchise model.

In the construction sector, many self-employed workers are engaged on building sites on behalf of
major building and construction firms without being counted amongst their employees. It is noticeable
that Morgan Sindall (£50,249) Persimmon (£33,409) and Taylor Wimpey (£41,483) in our sample have
median pay levels much higher than the £24,964 suggested by Unite the Union as a typical rate for a
construction worker within the National Vocational Qualification level 2 band covering the largest num-
ber of workers in the sector.

Insights from Unite, who represent many outsourced workers across the companies in our sample,
provide further indication of the extent of outsourcing of low-paid work. In the financials industry, Aviva,
Barclays, HSBC, Lloyds, M&G, Phoenix, Prudential, RBS and RSA amongst others have outsourced
roles in areas including facilities management, post-room, scanning, cleaning, catering, maintenance
and pensions administration.

However, it is possible to make a crude estimation of the pay ratios between the CEO and their very lowest
paid workers by using annualised equivalents of the Real Living Wage and the statutory minimum wage
(also now branded as the ‘National Living Wage’).

The Living Wage Foundation accredits employers that pay a ‘real Living Wage’ (to all workers, including
indirectly employed staff if they work for 2 or more hours a week, for 8 or more consecutive weeks a year)
that independent experts calculate is the minimum needed to support a decent standard of living.

For those companies accredited by the Living Wage Foundation, we have assumed their lowest paid
workers are paid £16,926, the annualised 2019/2020 hourly Living Wage rate of £9.30, based on a 35-hour
week. For non-accredited companies, we have assumed that they are paid the annual equivalent of the
statutory national minimum wage 2019/2020 rate for those aged 25 and over, based on a 35-hour week,
which is £14,942.

Using this calculation, the median CEO/low paid worker (i.e. national minimum or real living wage earner)
ratio is 130:1, significantly higher than the median CEO/lower quartile employee ratio of 71:1.

For FTSE 100 companies, the ratio is 214:1 compared to the median CEO/lower quartile employee ratio
of 109:1. Table 10 shows the ten largest gaps between companies’ CEOs and the annualised equivalent
of either the real living wage (if the company is an accredited living wage employer) or the national
minimum wage.

Standard Life Foundation | Pay ratio report December 2020 28

Table 10: 10 highest CEO/low paid worker ratio

Company Index Industry Living/ minimum
wage (£)

CEO/low paid
worker ratio

Ocado 100 Retail 14,942 3,930
Astra Zeneca 100 Health Care 16,926 847
BP 100 Oil & Gas 16,926 613
Experian 100 Industrial Goods & Services 16,926 608
Royal Dutch Shell 100 Oil & Gas 14,942 585
CRH 100 Construction & Materials 14,942 550
Berkeley 100 Consumer Goods 14,942 537
RELX 100 Media 16,926 513
GSK 100 Health Care 16,926 495
Prudential 100 Insurance 14,942 450

This table suggests potential extreme pay differences within UK companies, with several CEOs making
500- or 600-times workers on the minimum or living wage. As with the very high ratios identified in
section 1 of this report, it will be important for stakeholders to establish how accurate these estimates
reflect highest to lowest earner pay gaps at UK companies and their impact on factors such as employee
well-being, morale and commitment to the company.

Standard Life Foundation | Payratios report December 2020 29

The potential to redistribute05

This section examines pay ratios between the upper and lower quartiles,
highlighting the companies with the highest ratios. It also discusses
hypothetical redistributions from the upper to the lower quartile, examining
what difference various levels of redistribution would make to the lower
earners and at what cost to the higher earners.

The ‘opportunity cost’ of high pay

Our analysis of pay ratio disclosures so far has provided insights on intra-firm inequality at some of
the UK’s biggest employers. This can inform the understandable moral concerns about whether the
prevailing CEO pay levels and CEO worker pay gaps can be justified, and also the rich academic,
business and policy debate around the impact on issues such as democracy, health and wellbeing, social
cohesion and economic productivity.

However, in practical terms it is important to examine the ‘opportunity costs’ associated with top pay –
particularly in terms of the cost to low earners. We can use the pay ratios to help understand the degree
of potential redistribution that might be possible within firms, if they reallocated some of their expenditure
on the pay of high earners to those in the middle and at the bottom.

Redistributing CEO pay

Some of the largest CEO pay awards on their own could make a substantial difference to the incomes of
lower earners if shared more evenly. Most obviously, if £57m of Ocado’s CEO award of £58m was shared
amongst all of the company’s 15,000 employees, each employee would receive a bonus of £3,800; a
very significant amount compared to Ocado’s median pay of £22,500. This would still leave Tim Steiner,
Ocado’s CEO, with an award of £1m.

Of course, Ocado is something of an outlier. However, there are other examples of companies where
redistributing from the CEO to low and middle earners would also result in a substantial pay rise for the
low and middle earners. At Watches of Switzerland, redistributing £5.5m of the CEO’s £6.5m award
would result in a bonus of over £5,000 for roughly 1,000 employees earning less the median pay of
£24,900. At IWG, redistributing £3.5m of the CEO’s £4.5m award would result in an award of £1,400 for
the 2,400 employees earning below the lower quartile threshold of £19,400.

More generally, a CEO pay award of £5m (there are 23 in our sample who earn at least this amount)
equates to the equivalent cost of 295 workers earning the 2019/20 UK real living wage for a year. £5
million could raise the pay of 2,520 minimum wage workers to the real living wage.21

21 This calculation uses the annualised statutory national minimum wage at the 2019/2020 rate for those aged 25 and over,
based on a 35-hour week, which is £14,942, and the annualised 2019/2020 Living Wage hourly rate of £9.30, based on a
35-hour week, which is £16,926.

Standard Life Foundation | Pay ratio report December 2020 30

Upper quartile to lower quartile pay gaps

However, even in the case of CEOs paid millions, the pay of one individual may not be enough to enable
major pay increases if shared across hundreds or thousands of their colleagues. But redistributing
from top earners more broadly could potentially result in much bigger gains for those in the middle and
at the bottom. Looking at gaps between upper and lower quartile earners as detailed in the pay ratio
disclosures offers some insight into the scale and limitations of this potential at different companies.

Figure 4: 10 highest upper quartile/lower quartile ratios

Perhaps the most striking aspect of the upper quartile to lower quartile ratios is that even the widest
gaps shown in figure 4 are small compared to those between CEOs and the median. In this respect, the
disclosures mirror income distributions across society as a whole.

Research by the Autonomy think-tank (based on the Annual Survey of Hours and Earnings 2019) as part
of a project with the High Pay Centre estimated that the threshold for the top 1% of UK full-time workers
was just over £150,000 while the threshold for the top 0.1% was around £388,000.22 That same year,
the thresholds for the median and the 75th percentile of UK full time workers were respectively just over
£30,000 and £43,000.

In other words, the ratio of the 75th percentile to the median is significantly smaller than the 99th
percentile to the 75th, which in turn is only slightly larger than the ratio of the 99.9th to the 99th points.

Similarly, the median upper quartile pay threshold for the companies that have disclosed is £59,133. This
is a substantial sum of money that would put someone earning a full-time salary of this amount close
to the top 10% of the highest-paid full-time UK workers. However, it is not what most people would
consider to be seriously rich.

FTSE 100
FTSE 250 Investec 3.18

Brewin Dolphin Holdings 3.2

HSBC 3.23

Clarkson 3.27

Bodycote 3.32

Rathbone Bros 3.65

Britsh American Tobacco 3.96

TP ICAP 4.04

Tate & Lyle 4.37

6.6BP 52,500

22 Autonomy, Paying for Covid: capping excessive salaries to save industries, 2020
via https://autonomy.work/portfolio/payratios/

Standard Life Foundation | Pay ratio report December 2020 31

Upper quartile to lower quartile redistribution

As the pay ratio disclosures provide no further breakdown of pay between the 75th percentile and the
CEO, we can only confidently estimate hypothetical redistributions from the top quarter of earners to the
lower quarter on the basis of the top quarter employees earning the amount disclosed for earnings at the
75th percentile (in reality, they all earn at least this amount, with many making vast amounts more).

On that basis, redistributions from the median upper quartile threshold to workers in the lower quartile
would have the following value per worker:

Table 11: hypothetical redistributions from median upper quartile threshold to
lower quartile earners

% redistribution from median upper quartile
threshold to lower quartile earners

Median increase in pay for lower quartile earners

1% £591
3% £1,774
5% £2,957
10% £5,913

This table conceals the fact that there is huge variation between companies in terms of the scope for
redistribution. At many companies with the lowest-paid workers, even those in the upper quartile are
also paid very little: these are often companies in the retail or travel and leisure industries where pay
distribution tends to be fairly flat.

Conversely, at those companies with the highest upper quartile thresholds, the lower quartile thresholds
are still well above the median threshold of gross earnings for the UK as a whole.

To illustrate this, the table below shows the five companies with the lowest lower quartile thresholds and
the upper quartile thresholds at those companies, and the five companies with the highest upper quartile
thresholds and their lower quartile thresholds.

Table 12: Companies with the 5 lowest lower quartile thresholds and
5 highest upper quartile thresholds

5 companies with lowest lower
quartile thresholds

Industry Lower quartile
threshold (£)

Upper quartile
threshold (£)

Mitchells and Butlers Travel & Leisure 14,014 15,881
Associated British Foods Consumer Goods 14,175 24,026
WHSmith Retail 14,276 17,034
Homeserve Retail 14,493 32,232
Wetherspoons Travel & Leisure 14,760 27,333
5 companies with highest
upper quartile thresholds

Industry Lower quartile
threshold (£)

Upper quartile
threshold (£)

TP ICAP Financial Services 57,064 230,554
Man Group Financial Services 83,084 227,235
Standard Chartered Banks 83,000 212,000
Tate & Lyle Consumer Goods 46,064 201,522
British American Tobacco Consumer Goods 46,216 183,179

Standard Life Foundation | Pay ratio report December 2020 32

In the case of the companies with the five lowest lower quartile pay thresholds, the upper quartile earners
are also not especially well-paid, suggesting that there would be little case to redistribute to the bottom
quarter by reducing pay of employees at the upper quartile threshold.

Conversely, at the companies with the five highest upper quartile thresholds, even those at the lower
quartile earn comfortably above the amount that Autonomy estimate to be an upper quartile salary across
the UK economy as a whole.

Of course, this could still mean there is scope to redistribute from top earners above the upper quartile
threshold in the former group of companies. Similarly, there may be a pressing need to raise the pay of
low-paid employees below the lower quartile in the latter group. It is just that we cannot gain any insights
to this effect from the pay ratio disclosures.

There is, however, greater scope for substantial pay redistribution from the upper quartile to the lower
quartile at other companies in the sample. Table 13 highlights ten companies where the upper quartile
workers earn at least £50,000 and the lower quartile earn under £25,000. In each case, a redistribution
of 3% from upper to lower quartile makes only a small difference to the earnings of the latter group while
increasing the pay of the latter group much more substantially.

Table 13: redistribution from upper quartile to lower quartile earners

Company Lower quartile
threshold

(£)

Upper quartile
threshold

(£)

3% of upper
quartile

threshold
(£)

Lower quartile
threshold
following

redistribution
(£)

Upper
quartile

threshold
following

redistribution
(£)

BP 19,108 126,085 3,783 22,891 122,312
Bodycote 22,379 74,341 2,230 24,609 72,111
Capita 19,147 57,049 1,711 20,858 55,338
Intercontinental
Hotels

18,786 57,383 1,721 20,507 55,662

RSA 23,152 59,663 1,790 24,942 57,873
Paragon Banking 24,000 54,000 1,620 25,620 52,380
Inchcape 24,000 52,000 1,560 25,560 50,440
Burberry 24,000 52,000 1,560 25,560 50,440
Dechra
Pharmaceuticals

24,000 57,000 1,710 25,710 55,290

One Savings 24,600 61,500 1,845 26,445 59,655

It is worth re-emphasising that top quartile earners at these companies earn above the upper quartile
threshold, and lower quartile earners earn below the lower quartile threshold: there is, therefore, potential
to raise pay for lower earners significantly with even more minimal redistribution from those in higher
earning brackets.

The treatment of indirectly employed workers by the pay ratios is very relevant to calculations of the
potential to re-balance pay distribution. Including large numbers of low-paid workers may alter the balance
between the upper and lower quartiles of the workforce, meaning redistributions from top earners would
have to be shared amongst a much larger group of lower earners, leading to smaller increases.

Standard Life Foundation | Pay ratio report December 2020 33

This would not necessarily affect potential redistributions at all the companies in our sample, but looking
at Table 13, for example, Intercontinental Hotels employs a franchising model which means that many
lower-earning hotel workers are not included in the ratio calculation. Therefore, there is perhaps less
potential to raise incomes for lower earners significantly through a re-balancing of pay than the pay ratio
disclosures suggest.

It is important to be clear that this report is not necessarily calling for the enactment of the potential pay
redistributions we outline. Even in the cases where hypothetical redistributions from high to low earners
would yield real benefits to the latter group while costing the former little, it might be challenging to ask
upper quartile earners to accept pay reductions, even by the small amounts suggested.

However, the hypothetical redistributions would not have to take the form of an immediate subtraction
from the pay of high earners and addition to that of those in the middle and at the bottom. They could
instead serve as a guide or target for companies seeking to improve the pay of those that need it most
for a more equal pay distribution over the longer term, and could be enacted not by pay cuts but by
reducing pay increases for those at the top whilst raising pay more substantially for those at the bottom
over several years.

Given the context of pay stagnation and pay inequality in the UK, the possibility of rebalancing pay
in this way should be of considerable interest to stakeholders including businesses, investors, trade
unions and policymakers.23

Top pay between the upper quartile threshold and the CEO

In order to understand the potential for changes to corporate pay distributions to boost lower and
middle income workers by redistributing only from the very rich – those in the top 1% of the UK earnings
distribution or higher, rather than those in the top 10% or 25% (where many of the upper quartile thresholds
across our sample are located) – we need better information on what those at the very top beyond the CEO
are paid relative to their colleagues. Data in quartiles does not provide sufficient granularity to do this.

23 See for example, data showing the UK has the 9th highest income inequality of 40 members of the OECD group of advanced
economies – OECD, Income inequality data, 2020 via https://data.oecd.org/inequality/ income-inequality.htm and figures
showing that the UK has just endured its worst decade for pay growth for a century – Resolution Foundation, The economic
history of the 2010s, 3 January 2020 via https://www.resolutionfoundation.org/comment/the-economic-history-of-the-2010s/

Standard Life Foundation | Pay ratio report December 2020 34

Box 3: Excessive incomes and a maximum wage?

Research by Autonomy cited in the previous section suggests a worker at the 99th percentile of the
UK-wide earnings distribution (earning around £150,0000) makes roughly three and a half times as
much as a counterpart at the 75th percentile.

In other words, their income enables a lifestyle far beyond the means of even those with above average
pay, raising the question of whether earnings beyond this level represent an excessive reward or incen-
tive for taking on more demanding roles.

Autonomy have used the research to support the argument for a ‘maximum wage’ with incomes
capped in the low hundreds of thousands.24 They argue that – across the UK as a whole – this could
free up resources for those whose need is greater, and would represent a more efficient distribution of
the prosperity generated by our economy.

This is perhaps a subject that merits wider discussion, including of how it might apply at the level of
individual companies. Certainly, workers or their trade union representatives would be interested in their
employers’ expenditure on pay packages over a certain limit, and whether this could enable meaningful
pay rises for lower earners if redistributed.

Similarly, information on a company’s expenditure on very highly-paid employees could be relevant to
investors, particularly if they felt that this money could be used more productively elsewhere (including
in pay for the wider workforce) or simply returned to shareholders.

The UK-listed banks, which do provide more detailed disclosures, are an interesting case study in this
respect. For example, the RBS 2019 annual report produced a table, replicated in figure 5, which shows
the number of employees falling into particular pay bands.

Figure 5: RBS earners by pay band
Summary of remuneration levels for employees in 2019
46,152 employees earned a total remuneration of up to £50,000
12,117 employees earned a total remuneration of between £50,000 and £100,000
5,218 employees earned a total remuneration of between £100,000 and £250,000
910 employees earned a total remuneration of over £250,000

The banks also detail their total expenditure on ‘material risk takers’ (staff in the most strategically
significant positions that would include most if not all of their highest-paid employees). At the 4 major
UK-listed banks these individuals account for between 0.4% and 2% of the (global) employee population,
and are currently paid on average between £400k and £900k.

A hypothetical redistribution from these high earners to lower-paid employees would significantly boost
the wages of the latter group while the former would retain pay packages worth hundreds of thousands
of pounds even after the redistributions had taken place.

24 Autonomy/High Pay Centre, Paying for Covid: capping excessive salaries to save industries, 2020 via
https://autonomy.work/wp-content/uploads/2020/10/2020OCT_SalaryCap_Ameneded

Standard Life Foundation | Pay ratio report December 2020 35

Table 14: Hypothetical redistribution at UK-listed banks
(all figures for the year 2019)

Company Total
employees

Number of
high earners

(MRTs)

Spend on
high earners

(£m)

Value of 50% of high
earners earnings

per below-median
employee (£)

Average high earner
pay post hypothetical
redistribution (£000)

Barclays 86,931 1,704 1,405 16,162 412
HSBC 247,055 1,159 1,048 4,241 452
Lloyds 70,083 292 157.8 2,252 270
RBS 64,200 751 327.21 5,097 218

Engaging on top pay

Banks are unusual in terms of their number of very high earning employees, so it is not necessarily the
case that there is the same hypothetical potential to rebalance pay at companies in other industries.

At Lloyds, for example – a domestically-focused bank with the majority of staff based in the UK –
the MRTs account for about 0.4% of the employee population, but consume around 4.6% of total
expenditure on pay.

More detailed data is needed to understand how typical this is of corporate Britain – one would expect
pay inequality within firms and expenditure on high earners to vary substantially by industry. However,
there does appear to be considerable potential to significantly boost the pay of low earners by
redistributing pay from those at the very top, with the latter group still remaining very well-paid by the
standards of the wider economy, at some companies at least.

Given that the UK has just endured its weakest decade of pay growth for a century, this presents a
strong case for more granular disclosure requirements relating to pay for high earners between the upper
quartile threshold and the CEO.

In the meantime, the pay ratio disclosures may serve as a useful starting point for more detailed
discussions between stakeholders – such as trade unions or investors – and companies on pay for top
earners and the value and opportunity costs that result for the business.

Standard Life Foundation | Payratios report December 2020 36

Narrative reporting06

This section examines the narrative reports that companies are required to
provide to contextualise their pay ratio data, and examines how useful the
initial reports have been for stakeholders.

Lack of narrative

As well as publishing the pay ratio data itself, companies are also required to provide a ‘narrative’ to
explain the size of the pay ratios. This is an important requirement, given that, as discussed, the data on
its own does not explain a company’s pay structure or its employment model. A qualitative explanation of
the pay ratio data can add useful context for stakeholders in this respect.

We found that a large number of companies provided little or no narrative. This is particularly concerning
in the case of companies with low workforce pay and/or high pay ratios, where we would want to see
companies providing an explanation of pay levels and ideally what actions might be taken to distribute
pay more fairly. For example, Homeserve, Dunelm and Wetherspoons, all of which have lower quartile
thresholds of under £17,000, provided no accompanying narrative to their disclosures.

Engaging with stakeholder concerns

Whilst some companies provided a more detailed narrative, explaining, for example, the workforce profile
or the company’s employment model, there has been very little engagement with any of the criticisms
of pay gaps regarding fairness or proportionality, or discussion of how the board are planning to use the
pay ratio data in the future in order to address these criticisms.25 The statements also do not engage with
the gaps between the upper quartile, median and lower quartile thresholds. As we have shown in the
previous section, these are potentially material to employees’ absolute pay levels and will be of as much
interest to them as the gap between them and the CEO.

As we discussed in the interim report, in the cases where low pay is accompanied by a narrative,
justifications of this tend either to stress the ‘diversity’ of roles within the workforce or to point out that
most staff are in roles which are not highly valued by the market. For example, BP’s annual report states
that the pay ratio includes workers ‘who are employed in roles which attract relatively lower market
rates of pay’. Similarly, JD Sports, which has a lower quartile threshold of £16,067, says that its pay is
‘in line with typical practice in the retail sector’. The responsibility for low pay is thus shifted away from
the company and onto ‘the market’. Companies are not forbidden from paying higher than the market.
Indeed, for some larger employers, market rates in their sector are a consequence of their decisions on
pay as well as vice versa.

25 One of the better examples of narrative reporting is Experian’s 2020 Annual Report, which explains that they have a Sharesave
scheme available to all employees, that eligibility for Long-Term Incentive Plans has been expanded to more employees this
year, and that they have been paying the Living Wage since 2015.

Standard Life Foundation | Pay ratio report December 2020 37

Box 4: Corporate purpose

Directors’ responsibilities as outlined in section 172 of the 2006 Companies Act are to ‘have regard’ for
the interests of all stakeholders, including their workers when carrying out their duties as Directors.26
Concepts such as ‘purposeful business’ or ‘stakeholder capitalism’, which argue that businesses
should prioritise good outcomes for workers and wider society at least as highly as financial returns,
are being discussed increasingly seriously by academics, business leaders and commentators.27

In this context, how boards sustainably marry their objectives in terms of pay for their workers and
returns for their shareholders, and how this is borne out in their pay distribution, is an important aspect
of their business philosophy that might be discussed in pay ratio narrative reporting, or elsewhere in
annual reports. However, this is currently very rarely the case. Research by Grant Thornton found that
just 6% of FTSE 350 companies provided meaningful statements of corporate purpose beyond profit
backed by measurable performance indicators.28

‘Copy and paste’ reporting

We also noted in the interim report that a large number of companies use very similar wording in their
narratives. For example, Rentokil’s annual report states that:

‘The median pay ratio is consistent with the pay, reward and progression
policies for the Company’s UK employees taken as a whole.’

ITV uses almost exactly the same phrase:

‘The median pay ratio for 2019 is considered to be consistent with the pay,
reward and progression policies for the Company’s UK employees taken
as a whole.’

HSBC, Tesco, IMI, Spectris, WHSmith and Drax also use very similar variants of this in their annual
reports. This phrase is taken from the reporting regulations, which state that the company should explain:

‘whether, and if so why, the company believes the median pay ratio for the
relevant financial year is consistent with the pay, reward and progression
policies for the company’s UK employees taken as a whole.’29

Several companies have provided explanations of why they believe this statement to be true, though
in some cases they provide minimal explanations of their employee pay policies, only saying that
employee’s packages are set with reference to the external market. More concerningly, others have
simply stated that their median pay ratio is consistent with their pay, reward and progression policies for
employees, and have not explained why this is the case.

26 UK Government, Companies Act 2006 via https://www.legislation.gov.uk/ukpga/2006/46/section/172
27 For examples, see Financial Times, Capitalism: Time for a Reset, 16 September 2019 via https://aboutus.ft.com/en-gb/

announcements/ft-sets-the-agenda-with-new-brand-platform/ or British Academy, Principles for Purposeful Business, 2019
via https://www.thebritishacademy.ac.uk/publications/future-of-the-corporation-principles-for-purposeful-business/

28 Grant Thornton, Corporate Governance Review:2020 via https://www2.grantthornton.co.uk/corporate-governance-
review-2020.html?_ga=2.55819883.1335805288.1606923606-433553438.1606923606

29 UK Government, Companies (Miscellaneous Reporting) Regulations 2018, via
https://www.legislation.gov.uk/ukdsi/2018/9780111170298

Standard Life Foundation | Pay ratio report December 2020 38

Engaging on narrative

It is important to note that companies may be sensitive to criticism that annual reports, and the
remuneration report sections in particular, have become overly long (with remuneration reports in excess
of 20 pages now commonplace). However, statements such as the above, which tell us little about the
company’s pay practices, could easily be replaced with something more insightful.

The pay ratio disclosures have been complemented by a number of other recent corporate governance
and stewardship reforms. These include the 2019 update to the Stewardship Code, setting expectations
of the investment industry in terms of their engagement with investee companies. The 2018 Corporate
Governance Code requires companies to report on their engagement with their stakeholders, and to
introduce one of three mechanisms to promote worker voice in strategic decision-making: worker
directors on boards, non-executive directors with specific responsibility for stakeholder issues, or
stakeholder committees.

Narrative pay ratio reporting is very relevant to both of these initiatives. Executive pay practices have
historically been a key area of engagement between investors and companies, while other stakeholders –
particularly the company’s workforce – have an obvious interest in pay ratios and pay distribution.
Therefore, we would expect both investors’ stewardship activities and stakeholder representation
mechanisms in corporate governance structures to encourage useful narrative reporting on these topics
in future.

Standard Life Foundation | Payratios report December 2020 39

Conclusions and recommendations

This section summarises the key insights from our research and highlights
the debates we hope that it will prompt. It also discusses some of the
limitations we have identified in the pay ratio disclosures. Finally, it makes
recommendations for how the pay ratio disclosures could be improved in both
policy and practice going forward.

Insights from pay ratio reporting

The initial disclosures under the pay ratio reporting requirements yield a number of insights and suggest
several potential avenues for further research as well as action.

Specific insights include:

• The median pay ratios and the typical thresholds for upper, median and lower quartile pay
for particular industries and sectors. Provided they are not used to make sweeping or instant
judgements, this data provides useful evidence to inform vital discussions between companies
and their investors, workers, trade unions and other stakeholders about their employment models
and the link to their wider strategy. Data on Environmental, Social and Governance (ESG) issues
is becoming increasingly important to investors, and pay distribution relates closely to the ‘S’ in
ESG, which has become even more relevant given the interest in how companies are treating their
workers in the aftermath of the coronavirus outbreak.

• The scale and variation in pay gaps within the UK’s largest listed companies, ranging from between
10:1 and 20:1 at the companies with the lowest CEO/median employee ratios to between 200:1
and 300:1 at those with the highest, with Ocado as an outlier at 2,605:1. These gaps become even
larger when we look at the gap between the CEO and a worker earning the minimum or living wage.

• Even though we know that the pay ratio disclosures understate the extent of low pay in the UK, they
nonetheless show a concerningly high prevalence of low pay amongst the FTSE 350. There are 11
companies where the threshold for lower quartile earnings is lower than the annualised equivalent
of the Real Living Wage for a 35-hour week, and 34 where the lower quartile threshold is lower than
the annualised London Living Wage.30 This suggests that there are a number of employees at these
large, high value companies struggling with the cost of living – even before indirectly employed
workers are taken into account.

• The distribution of pay across the workforce varies widely between companies. In some companies,
there is scope for a hypothetical re-balancing of pay distribution: a small proportion of top pay
redistributed from the top quartile to the bottom would make a huge difference to the incomes of
lower quartile earners, without drastically reducing the incomes of those in the top quartile. It is also
the case for some companies that redistributing some of the CEO’s pay would make a substantial
difference to those on low incomes. In other companies, however, we would need more granular
information on pay in order to identify opportunities for meaningful redistribution.

30 The Real Living Wage and the London Living Wage are both calculated by the Living Wage Foundation and are minimum
standards that companies can adopt on a voluntary basis.

Standard Life Foundation | Pay ratio report December 2020 40

The research also suggests a number of factors which could be relevant to the size of pay ratios, and
which could inform debate around why CEOs and different types of workers at different points of the
organisational pay distribution are paid what they are:

• Industry

• Trade union influence

• Employment model

• Company size, in terms of both market capitalisation and employee numbers

• Company debt

• Company complexity

Questions for stakeholder engagement

Given that policymakers, business leaders, trade unions and many other stakeholder groups all have an
interest in raising the incomes and living standards of UK workers – particularly the lowest paid workers –
the pay ratios are a critically important issue to debate. We hope that these insights can lead to further
discussion, research and ultimately improvements to policy and practice in relation to pay. Questions that
might begin this discussion could include:

• How can we value low-paid but essential jobs more highly, and what measures can we take to raise
the pay of these workers?

• How can we expand trade union membership across more companies, and what would be the
implications of this?

• How will investors and the directors and committees responsible for workforce representation
in corporate governance structures engage with pay ratio disclosures – particularly in terms of
explanations of pay structures and their link to the company’s broader strategy and business model?

• Should increased company size necessarily result in higher CEO pay and why/why not?

• How should pay ratio reporting and pay ratios within companies relate to concepts of corporate
purpose, and the responsibilities of businesses to stakeholders beyond their shareholders?

Limitations of the pay ratio disclosures

Whilst acknowledging the vital and informative resource that the first year of pay ratio disclosures
provide, it is also important to identify their limitations. These include:

• The exclusion of outsourced workers. Given the prevalence of outsourcing in the UK economy, this
likely affects a large proportion of the companies that have disclosed, meaning that the pay ratios
do not give an accurate picture of pay levels in these companies. This makes it difficult to compare
companies, especially those with different employment models. This should prompt a discussion
about the use of outsourced or franchised employment and business models and their implications
for stakeholders including the business, their investors, the workers themselves and wider society.

• The exclusion of privately-owned UK companies or foreign-owned firms operating in the UK. Only
UK-listed companies are required to disclose their pay ratios, and many of these base the majority
of their operations overseas – it is striking that over a third of the FTSE 350 will not provide pay ratio
figures because they do have enough employees in the UK to obligate disclosures. Conversely,
many organisations that are major employers are not subject to the requirements because they are
not listed. Given that we are interested in the pay and working conditions of all UK workers, this is a
major shortcoming. This challenge is compounded by the fact that the majority of companies in the
sample do not disclose their number of UK employees.

Standard Life Foundation | Pay ratio report December 2020 41

• The lack of information on the pay of those between the top quartile and the CEO. The top quartile
covers everyone from CEOs typically earning millions of pounds to those at the 75th percentile, some
of whom are undoubtedly comfortable, but not what most people would consider excessively rich.

Recommendations for better reporting

Given that this is the first year of pay ratio disclosures, it’s unlikely that the government will review or
change the requirements until they have been in place for at least two or three years.

However, investors, unions, employees and other stakeholders can still push individual companies to
change their practices with immediate effect. The recommendations below can therefore be understood
both as policy recommendations for the future and as changes that stakeholders should encourage
companies to make voluntarily.

• Companies should provide more granular information on the earnings of those between the
upper quartile threshold and the CEO. The disproportionate share of incomes captured by those
at the very top is one of the biggest issues relating to economic inequality in the UK, and more
information on how this occurs at particular employers would contribute to our understanding
of how to achieve a fairer share of incomes accruing to those in the middle and at the bottom.
Possible models for granular reporting could include reporting on those with pay awards of over
£150k, or on the pay of the top 1% of the company’s employees.

• Outsourced UK workers should be included in the pay ratio calculations, since these workers are
vital to the companies’ operations and often make up a large proportion of workers. Their inclusion
would provide a more accurate picture of companies’ pay practices and would also make it easier
to compare companies. An important question here is which indirectly employed workers should be
included in the calculation. We suggest using the Living Wage Foundation’s standard for ‘regularly
contracted staff’ which covers ‘contracted staff who work 2 or more hours a week, for 8 or more
consecutive weeks a year’.31

• Higher standards and clearer expectations of narrative reporting around the ratios could enable
better understanding of the link between pay distribution and business strategy. We would suggest
that companies should explain 1) how boards plan to use the pay ratio disclosures going forward, 2)
whether and to what extent workers and investors feed into the pay-setting process, and 3) to what
extent raising pay for low- to middle-income workers and reducing inequality is a priority for the
company. However, we are aware that many remuneration reports are already overly long, making
it difficult for stakeholders to find the information they need, so we suggest that rather than simply
adding this information, companies should reshape remuneration reporting to put more emphasis
on pay across the workforce.

• Companies should directly provide information on pay ratios to their workers. The objective of
pay ratio disclosures is to empower low- and middle-income workers to achieve better pay and
working conditions – if individuals have more information about pay levels across their workforce,
this can strengthen their bargaining position in relation to their own pay. However, company annual
reports are long and confusing, and it is unrealistic to expect a critical mass of workers to read
through them in order to access pay distribution data. Companies that are confident that their pay
practices are fair ought not to be afraid of discussing them – therefore, CEO pay levels and pay
ratio data should be circulated to all employees in an individual letter, as well being published in
annual reports.

31 Living Wage Foundation website, ‘FAQs’, via https://www.livingwage.org.uk/faqs#t136n1755

Standard Life Foundation | Pay ratio report December 2020 42

• Companies should provide data on their number of UK employees. One of the major gaps in the
pay ratio data is that, while it shows the gaps between the CEO and the different quartiles of the
workforce, it does not include the number of employees covered (even though this information
needs to be calculated in order to provide the ratios). As such, it becomes challenging to assess
the wider importance of the different companies’ pay practices, to prioritise analysis of individual
companies or to accurately calculate the number of workers that would benefit or lose out from
more even pay distribution. External scrutiny is undoubtedly one of the factors shaping corporate
pay practices, so if this scrutiny is more informed/accurate that ought to result in fairer pay.

• Apply the pay ratio disclosure requirements to all large employers, giving a more complete
picture of the pay inequality, governance, workplace culture and potential for redistribution that
the disclosures provide across the UK. How large employers distribute their pay has socio-
economic implications for the UK regardless of whether or not they are listed on the stock
market. Therefore, all those companies that are expected to comply with the Wates Principles for
Corporate Governance of private companies, as well as institutions that are large employers such
as universities, hospitals and local authorities, should be subject to the same pay ratio disclosure
requirements as those with a premium listing.32

Recommendations for wider policy change

Whilst the purpose of this report is to analyse the pay ratio disclosures and identify ways in which they
can be improved, the High Pay Centre’s ultimate aim is to raise pay for low and middle earners in the UK.
We therefore propose a number of accompanying recommendations that would complement the pay
ratio disclosures, and ensure that the information they provide is used to support efforts to improve low-
and middle-income workers’ pay and working conditions:

• Allow trade union access to workplaces, to inform workers of the benefits of collective
bargaining: Companies which negotiate with trade unions deliver higher rates of pay for low
and middle earners, as suggested by examples in this report and by wider research.33 Union
representatives can use the pay ratio disclosures to build arguments in support of improved pay
and working conditions, and highlight unfair pay gaps in a way that may be more challenging for
unrepresented individual workers.

• Establish sectoral governance bodies to monitor fair pay. These bodies could be made up of
stakeholders including representatives from business, unions, workers and government in a similar
fashion to the Wages Councils, which were in place in the UK until the 1990s. Their remit could
include setting guidelines for minimum wages and pay ratio limits across the sector, using pay ratio
disclosures to inform recommendations.

• Legislate for worker representation on company boards. This would allow workers to play a
meaningful part in the governance process, and would provide a voice at the highest level of the
company making the argument for more even pay distribution. The UK Corporate Governance Code
gives companies the option to appoint/elect worker directors as one of three options for introducing
stakeholders into their corporate governance structures, but this option has only been taken up in a
tiny number of instances.

32 Those with over 2,000 employees and/or turnover of £200 million and a balance sheet of £2 billion.
33 See e.g. Bryson A and Forth J, The added value of trade unions: New analyses for the TUC of the Workplace Employment

Relations Surveys 2004 and 2011, TUC, 2017 via https://www.tuc.org.uk/sites/default/files/1%20WERS%20lit%20review%20
new%20format%20%20RS_0

Standard Life Foundation | Pay ratio report December 2020 43

• Require companies to introduce all-employee profit sharing or share ownership schemes.34 One
of the reasons why some of the pay ratios between workers and CEOs are so wide is that CEOs
receive large share-based payments in addition to their regular salary while workers do not, even
though workers also deserve to be rewarded for good company performance. It is essential that these
schemes cover all, not just part, of the workforce. In France all companies are required to share an
element of profits exceeding a set amount calculated using factors including taxable profits, net equity,
wages and added value with their workforce. A similar requirement could be replicated in the UK.

• Amend company law to give the interests of all stakeholders equal importance, rather than
elevating shareholder interests above those of others. The 2018 Companies (Miscellaneous
Reporting) Regulations introduced a requirement for directors to report on how they have complied
with their section 172 responsibilities to have regard for stakeholders beyond shareholders. This is
a welcome development, but does not go far enough. A duty to run the company using a balanced
judgement of the long-term interest of all stakeholders would encourage boards to think more
deeply about pay distribution at their company and how to improve pay and conditions for the
majority of their workforce.

• Give shareholders binding votes on directors’ remuneration reports. Whilst shareholders have
a binding vote on a company’s remuneration policy, their vote on the remuneration report – i.e.
the executive pay packages – is only advisory. This can result in instances where a majority of
shareholders oppose the remuneration report – including the pay ratio – but it remains unchanged.
This was the case with Tesco in 2020, when two thirds of the shareholders opposed the remuneration
report.35 The CEO’s remuneration was not altered, however, and as a result Tesco has the 3rd highest
median pay ratio this year at 305:1.

• Require companies to include guidance on potential future pay ratio sizes in their remuneration
reports. The ‘Large and Medium Size Companies Regulations 2013’ requires companies outline
maximum, minimum and ‘target’ values for executive pay awards in the forthcoming year.36 These
disclosures should also include guidance on maximum, minimum and target pay ratio sizes over
the next three years. This would enable shareholders to take future pay ratio size into account when
considering their votes at company AGMs, thereby encouraging better stewardship of pay practices
on a company-wide basis, rather than just at board level.

Taken together, these measures would boost transparency, governance and accountability to
stakeholders at the UK’s biggest businesses, while strengthening the bargaining power of low- and
middle-income workers, and significantly improving living standards.

34 For more detail on the design of these schemes see Social Market Foundation, Strengthening employee share ownership in the
UK, February 2020 via https://www.smf.co.uk/wp-content/uploads/2020/02/ Employee-Share-Ownership-February-2020

35 Guardian, Tesco hit by shareholder revolt over executive pay, 26 June 2020 via https://www.theguardian.com/business/2020/
jun/26/tesco-sales-soar-as-customers-turn-to-deliveries-in-pandemic-coronavirus

36 UK Government, The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013
via https://www.legislation.gov.uk/ukdsi/2013/9780111100318/schedule

Standard Life Foundation | Payratios report December 2020 44

Appendix A: Methodology

This report is based on analysis of all the FTSE 350 companies to provide pay ratio disclosures prior to
30 November 2020.

Over the time period covered, a total of 186 FTSE 350 companies covered by the pay ratio reporting
requirements (78 from the FTSE 100 and 108 from the FTSE 250) published annual reports in which
pay ratios were disclosed. This excludes closed-end investment funds and companies with under
250 UK employees.

In addition to these mandatory disclosures, we have included some voluntary disclosures. 15 companies
which have not yet published their annual reports made voluntary disclosures in 2019. This brings the total
number of disclosures up to 201, which represents over 90% of companies that are required to disclose.

For the analysis detailed in Section 3, we commissioned Dr Aditi Gupta at Kings’ Business School,
Kings’ College London, and data analyst Steve Glenn of E-Reward to analyse the impact of specific
company characteristics on pay ratio size.

Dr Gupta carried out statistical tests using the High Pay Centre’s pay ratio data and Kings’ College
London’s databases to analyse the relationship between pay ratios and a range of company
characteristics. She undertook a series of univariate tests looking at the relationship between pay ratio
size and other individual variables, including proxies for company size and company performance. She
also carried multivariate tests controlling for multiple different company characteristics such as firm
age, productivity, market-to-book ratio and firm assets.

Steve Glenn of E-Reward supplemented this analysis with a study of the correlation between
companies’ three-year share price change, and their pay ratio.

Steve Glenn used the same sample of companies as the High Pay Centre, but excluded Ocado for
the share price change analysis as Ocado is an outlier. Dr Gupta’s sample consisted of the mandatory
disclosures only and excluded the voluntary disclosures.

Standard Life Foundation | Payratios report December 2020 45

Appendix B: Pay ratio disclosure requirements

The Companies (Miscellaneous Reporting) Regulations, introduced by Theresa May’s Conservative
government as part of a broader programme of corporate governance reform, require all UK-
incorporated companies with a premium stock market listing and over 250 UK employees to publish
‘pay ratios’, showing the relationship of their CEO’s pay to other employees in the company.

The regulations stipulate that companies must publish a table in their annual remuneration report
showing CEO pay relative to pay at the 75th, median and 25th percentile of the company’s UK
employees. That is to say, if all the company’s UK employees were ranked from highest to lowest
in terms of their total pay (on a full time equivalent basis) how would the CEO’s pay compare to the
thresholds for the upper quartile (i.e. the 75th percentile, earning more than 75% of employees), the
median (exactly in the middle of the ranking) and the lower quartile (the 25th percentile, earning more
than 25% of UK employees).

UK employees include everyone employed by the company under a contract of service, excluding
those who work wholly or mainly outside the UK. Indirectly employed workers also excluded.

CEO pay must be calculated using the existing formula for the so-called ‘single figure’ of total
remuneration, encompassing salary and all forms of pay and benefit including pensions, bonuses
and share awards. The employee total remuneration figure, provided at the 75th, median and 25th
percentile, includes salary, taxable benefits, cash bonuses, share-based pay and pensions. It should
be calculated ‘wherever possible’ by determining pay for all UK employees (on an FTE basis), ranking
them on a low-to-high basis and identifying the employees whose remuneration places them at the
upper, median and lower percentile points (option A).

Alternatively, companies may calculate the 25th, 50th and 75th percentile points based on their gender
pay reporting disclosures, which require them to identify the gender breakdown of employees in each
pay quartile, and thus to calculate the thresholds for each quartile (option B), or they may use other
existing pay data, provided it has been calculated no earlier than the previous financial year (option C).

The disclosure requirements apply to pay awarded for financial years beginning from 1 January 2019.
Therefore, the first mandatory disclosures appeared in annual reports published in 2020 for financial
years ending on or after 31 December 2019.

Standard Life Foundation

Standard Life Foundation funds research, policy work and
campaigning activities to tackle financial problems and improve
living standards for people on low-to-middle incomes in the UK. It
is an independent charitable foundation registered in Scotland.

www.standardlifefoundation.org.uk

Standard Life Foundation is registered in Scotland (SC359717) at 1 George Street, Edinburgh, EH2 2LL. A registered Scottish Charity (SC040877).

Telephone: 0207 618 1626

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2018-UK-Corporate-Governance-Code-FINAL

THE UK
CORPORATE
GOVERNANCE
CODE
JULY 2018

Financial Reporting Council

The FRC’s mission is to promote transparency and integrity in
business. The FRC sets the UK Corporate Governance and
Stewardship Codes and UK standards for accounting and actuarial
work; monitors and takes action to promote the quality of corporate
reporting; and operates independent enforcement arrangements for
accountants and actuaries. As the Competent Authority for audit in
the UK the FRC sets auditing and ethical standards and monitors
and enforces audit quality.

The FRC does not accept any liability to any
party for any loss, damage or costs howsoever
arising, whether directly or indirectly, whether
in contract, tort or otherwise from any action
or decision taken (or not taken) as a result of
any person relying on or otherwise using this
document or arising from any omission from it.

© The Financial Reporting Council Limited
2018

The Financial Reporting Council Limited is a
company limited by guarantee. Registered in
England number 2486368. Registered Office:
8th Floor, 125 London Wall, London EC2Y 5AS.

CONTENTS

Introduction 1

1 Board Leadership and Company Purpose 4

2 Division of Responsibilities 6

3 Composition, Succession and Evaluation 8

4 Audit, Risk and Internal Control 10

5 Remuneration 13

1 Guidance on Board Effectiveness 2018

INTRODUCTION

The first version of the UK Corporate Governance Code (the Code)
was published in 1992 by the Cadbury Committee. It defined corporate
governance as ‘the system by which companies are directed and
controlled. Boards of directors are responsible for the governance of their
companies. The shareholders’ role in governance is to appoint the directors
and the auditors and to satisfy themselves that an appropriate governance
structure is in place.’ This remains true today, but the environment in which
companies, their shareholders and wider stakeholders operate continues
to develop rapidly.
Companies do not exist in isolation. Successful and sustainable businesses
underpin our economy and society by providing employment and creating
prosperity. To succeed in the long-term, directors and the companies they
lead need to build and maintain successful relationships with a wide range
of stakeholders. These relationships will be successful and enduring if they
are based on respect, trust and mutual benefit. Accordingly, a company’s
culture should promote integrity and openness, value diversity and be
responsive to the views of shareholders and wider stakeholders.
Over the years the Code has been revised and expanded to take account
of the increasing demands on the UK’s corporate governance framework.
The principle of collective responsibility within a unitary board has been a
success and – alongside the stewardship activities of investors – played
a vital role in delivering high standards of governance and encouraging
long-term investment. Nevertheless, the debate about the nature and
extent of the framework has intensified as a result of financial crises and
high-profile examples of inadequate governance and misconduct, which
have led to poor outcomes for a wide range of stakeholders.
At the heart of this Code is an updated set of Principles that emphasise the
value of good corporate governance to long-term sustainable success. By
applying the Principles, following the more detailed Provisions and using
the associated guidance, companies can demonstrate throughout their
reporting how the governance of the company contributes to its long-
term sustainable success and achieves wider objectives.
Achieving this depends crucially on the way boards and companies
apply the spirit of the Principles. The Code does not set out a rigid set of
rules; instead it offers flexibility through the application of Principles and
through ‘comply or explain’ Provisions and supporting guidance. It is the
responsibility of boards to use this flexibility wisely and of investors and
their advisors to assess differing company approaches thoughtfully.

2Financial Reporting Council

Reporting on the Code

The 2018 Code focuses on the application of the Principles. The Listing
Rules require companies to make a statement of how they have applied
the Principles, in a manner that would enable shareholders to evaluate
how the Principles have been applied. The ability of investors to evaluate
the approach to governance is important. Reporting should cover the
application of the Principles in the context of the particular circumstances
of the company and how the board has set the company’s purpose and
strategy, met objectives and achieved outcomes through the decisions it
has taken.
It is important to report meaningfully when discussing the application of
the Principles and to avoid boilerplate reporting. The focus should be on
how these have been applied, articulating what action has been taken
and the resulting outcomes. High-quality reporting will include signposting
and cross-referencing to those parts of the annual report that describe
how the Principles have been applied. This will help investors with their
evaluation of company practices.
The effective application of the Principles should be supported by
high-quality reporting on the Provisions. These operate on a ‘comply or
explain’ basis and companies should avoid a ‘tick-box approach’. An
alternative to complying with a Provision may be justified in particular
circumstances based on a range of factors, including the size, complexity,
history and ownership structure of a company. Explanations should set
out the background, provide a clear rationale for the action the company
is taking, and explain the impact that the action has had. Where a
departure from a Provision is intended to be limited in time, the explanation
should indicate when the company expects to conform to the Provision.
Explanations are a positive opportunity to communicate, not an onerous
obligation.
In line with their responsibilities under the UK Stewardship Code,
investors should engage constructively and discuss with the company
any departures from recommended practice. In their consideration
of explanations, investors and their advisors should pay due regard
to a company’s individual circumstances. While they have every right
to challenge explanations if they are unconvincing, these must not be
evaluated in a mechanistic way. Investors and their advisors should also
give companies sufficient time to respond to enquiries about corporate
governance.

3 UK Corporate Governance Code 2018

Corporate governance reporting should also relate coherently to other
parts of the annual report – particularly the Strategic Report and other
complementary information – so that shareholders can effectively assess
the quality of the company’s governance arrangements, and the board’s
activities and contributions. This should include providing information that
enables shareholders to assess how the directors have performed their
duty under section 172 of the Companies Act 2006 (the Act) to promote
the success of the company. Nothing in this Code overrides or is intended
as an interpretation of the statutory statement of directors’ duties in the
Act.
The Code is also supported by the Guidance on Board Effectiveness (the
Guidance). We encourage boards and companies to use this to support
their activities. The Guidance does not set out the ‘right way’ to apply
the Code. It is intended to stimulate thinking on how boards can carry
out their role most effectively. The Guidance is designed to help boards
with their actions and decisions when reporting on the application of the
Code’s Principles. The board should also take into account the Financial
Reporting Council’s Guidance on Audit Committees and Guidance on
Risk Management, Internal Control and Related Financial and Business
Reporting.

Application

The Code is applicable to all companies with a premium listing, whether
incorporated in the UK or elsewhere. The new Code applies to accounting
periods beginning on or after 1 January 2019.
For parent companies with a premium listing, the board should ensure that
there is adequate co-operation within the group to enable it to discharge
its governance responsibilities under the Code effectively. This includes
the communication of the parent company’s purpose, values and strategy.
Externally managed investment companies (which typically have a different
board and company structure that may affect the relevance of particular
Principles) may wish to use the Association of Investment Companies’
Corporate Governance Code to meet their obligations under the Code.
In addition, the Association of Financial Mutuals produces an annotated
version of the Code for mutual insurers to use.

4Financial Reporting Council

1 BOARD LEADERSHIP
AND COMPANY PURPOSE
Principles
A. A successful company is led by an effective and entrepreneurial board, whose role is to

promote the long-term sustainable success of the company, generating value for shareholders
and contributing to wider society.

B. The board should establish the company’s purpose, values and strategy, and satisfy itself that
these and its culture are aligned. All directors must act with integrity, lead by example and
promote the desired culture.

C. The board should ensure that the necessary resources are in place for the company to meet
its objectives and measure performance against them. The board should also establish a
framework of prudent and effective controls, which enable risk to be assessed and managed.

D. In order for the company to meet its responsibilities to shareholders and stakeholders, the
board should ensure effective engagement with, and encourage participation from, these
parties.

E. The board should ensure that workforce policies and practices are consistent with the
company’s values and support its long-term sustainable success. The workforce should be
able to raise any matters of concern.

Provisions

1. The board should assess the basis on which the company generates
and preserves value over the long-term. It should describe in the
annual report how opportunities and risks to the future success of the
business have been considered and addressed, the sustainability of
the company’s business model and how its governance contributes
to the delivery of its strategy.

2. The board should assess and monitor culture. Where it is not satisfied
that policy, practices or behaviour throughout the business are
aligned with the company’s purpose, values and strategy, it should
seek assurance that management has taken corrective action. The
annual report should explain the board’s activities and any action
taken. In addition, it should include an explanation of the company’s
approach to investing in and rewarding its workforce.

3. In addition to formal general meetings, the chair should seek
regular engagement with major shareholders in order to understand
their views on governance and performance against the strategy.
Committee chairs should seek engagement with shareholders on
significant matters related to their areas of responsibility. The chair
should ensure that the board as a whole has a clear understanding
of the views of shareholders.

5 UK Corporate Governance Code 2018

4. When 20 per cent or more of votes have been cast against the board
recommendation for a resolution, the company should explain, when
announcing voting results, what actions it intends to take to consult
shareholders in order to understand the reasons behind the result. An
update on the views received from shareholders and actions taken
should be published no later than six months after the shareholder
meeting. The board should then provide a final summary in the annual
report and, if applicable, in the explanatory notes to resolutions at the
next shareholder meeting, on what impact the feedback has had on
the decisions the board has taken and any actions or resolutions
now proposed.1

5. The board should understand the views of the company’s other key
stakeholders and describe in the annual report how their interests
and the matters set out in section 172 of the Companies Act 2006
have been considered in board discussions and decision-making.2
The board should keep engagement mechanisms under review so
that they remain effective.

For engagement with the workforce,3 one or a combination of the
following methods should be used:
• a director appointed from the workforce;
• a formal workforce advisory panel;
• a designated non-executive director.

If the board has not chosen one or more of these methods, it
should explain what alternative arrangements are in place and why it
considers that they are effective.

6. There should be a means for the workforce to raise concerns in
confidence and – if they wish – anonymously. The board should
routinely review this and the reports arising from its operation. It
should ensure that arrangements are in place for the proportionate
and independent investigation of such matters and for follow-up
action.

7. The board should take action to identify and manage conflicts of
interest, including those resulting from significant shareholdings, and
ensure that the influence of third parties does not compromise or
override independent judgement.

8. Where directors have concerns about the operation of the board
or the management of the company that cannot be resolved, their
concerns should be recorded in the board minutes. On resignation,
a non-executive director should provide a written statement to the
chair, for circulation to the board, if they have any such concerns.

1 Details of significant votes against and related
company updates are available on the Public Register
maintained by The Investment Association – www.
theinvestmentassociation.org/publicregister.html

2 The Companies (Miscellaneous Reporting)
Regulations 2018 require directors to explain how
they have had regard to various matters in performing
their duty to promote the success of the company in
section 172 of the Companies Act 2006. The Financial
Reporting Council’s Guidance on the Strategic Report
supports reporting on the legislative requirement.

3 See the Guidance on Board Effectiveness Section 1
for a description of ‘workforce’ in this context.

https://www.theinvestmentassociation.org/publicregister.html

https://www.theinvestmentassociation.org/publicregister.html

6Financial Reporting Council

2 DIVISION OF RESPONSIBILITIES

Provisions
9. The chair should be independent on appointment when assessed

against the circumstances set out in Provision 10. The roles of chair
and chief executive should not be exercised by the same individual.
A chief executive should not become chair of the same company.
If, exceptionally, this is proposed by the board, major shareholders
should be consulted ahead of appointment. The board should set
out its reasons to all shareholders at the time of the appointment and
also publish these on the company website.

10. The board should identify in the annual report each non-executive
director it considers to be independent. Circumstances which are
likely to impair, or could appear to impair, a non-executive director’s
independence include, but are not limited to, whether a director:
• is or has been an employee of the company or group within the

last five years;
• has, or has had within the last three years, a material business

relationship with the company, either directly or as a partner,
shareholder, director or senior employee of a body that has such
a relationship with the company;

• has received or receives additional remuneration from the company
apart from a director’s fee, participates in the company’s share
option or a performance-related pay scheme, or is a member of
the company’s pension scheme;

Principles
F. The chair leads the board and is responsible for its overall effectiveness in directing the company.

They should demonstrate objective judgement throughout their tenure and promote a culture
of openness and debate. In addition, the chair facilitates constructive board relations and the
effective contribution of all non-executive directors, and ensures that directors receive accurate,
timely and clear information.

G. The board should include an appropriate combination of executive and non-executive (and,
in particular, independent non-executive) directors, such that no one individual or small
group of individuals dominates the board’s decision-making. There should be a clear division
of responsibilities between the leadership of the board and the executive leadership of the
company’s business.

H. Non-executive directors should have sufficient time to meet their board responsibilities. They
should provide constructive challenge, strategic guidance, offer specialist advice and hold
management to account.

I. The board, supported by the company secretary, should ensure that it has the policies, processes,
information, time and resources it needs in order to function effectively and efficiently.

7 UK Corporate Governance Code 2018

• has close family ties with any of the company’s advisers, directors
or senior employees;

• holds cross-directorships or has significant links with other
directors through involvement in other companies or bodies;

• represents a significant shareholder; or
• has served on the board for more than nine years from the date of

their first appointment.
Where any of these or other relevant circumstances apply, and

the board nonetheless considers that the non-executive director is
independent, a clear explanation should be provided.

11. At least half the board, excluding the chair, should be non-executive
directors whom the board considers to be independent.

12. The board should appoint one of the independent non-executive
directors to be the senior independent director to provide a sounding
board for the chair and serve as an intermediary for the other
directors and shareholders. Led by the senior independent director,
the non-executive directors should meet without the chair present
at least annually to appraise the chair’s performance, and on other
occasions as necessary.

13. Non-executive directors have a prime role in appointing and removing
executive directors. Non-executive directors should scrutinise and
hold to account the performance of management and individual
executive directors against agreed performance objectives. The
chair should hold meetings with the non-executive directors without
the executive directors present.

14. The responsibilities of the chair, chief executive, senior independent
director, board and committees should be clear, set out in writing,
agreed by the board and made publicly available. The annual
report should set out the number of meetings of the board and its
committees, and the individual attendance by directors.

15. When making new appointments, the board should take into account
other demands on directors’ time. Prior to appointment, significant
commitments should be disclosed with an indication of the time
involved. Additional external appointments should not be undertaken
without prior approval of the board, with the reasons for permitting
significant appointments explained in the annual report. Full-time
executive directors should not take on more than one non-executive
directorship in a FTSE 100 company or other significant appointment.

16. All directors should have access to the advice of the company
secretary, who is responsible for advising the board on all governance
matters. Both the appointment and removal of the company secretary
should be a matter for the whole board.

8Financial Reporting Council

3 COMPOSITION, SUCCESSION
AND EVALUATION

Provisions

17. The board should establish a nomination committee to lead the
process for appointments, ensure plans are in place for orderly
succession to both the board and senior management positions,
and oversee the development of a diverse pipeline for succession.
A majority of members of the committee should be independent
non-executive directors. The chair of the board should not chair the
committee when it is dealing with the appointment of their successor.

18. All directors should be subject to annual re-election. The board
should set out in the papers accompanying the resolutions to elect
each director the specific reasons why their contribution is, and
continues to be, important to the company’s long-term sustainable
success.

19. The chair should not remain in post beyond nine years from the date of
their first appointment to the board. To facilitate effective succession
planning and the development of a diverse board, this period can
be extended for a limited time, particularly in those cases where the
chair was an existing non-executive director on appointment. A clear
explanation should be provided.

20. Open advertising and/or an external search consultancy should
generally be used for the appointment of the chair and non-executive
directors. If an external search consultancy is engaged it should be
identified in the annual report alongside a statement about any other
connection it has with the company or individual directors.

4 The definition of ‘senior management’ for this
purpose should be the executive committee or the
first layer of management below board level, including
the company secretary.

5 Which protect against discrimination for those with
protected characteristics within the meaning of the
Equalities Act 2010.

Principles
J. Appointments to the board should be subject to a formal, rigorous and transparent procedure,

and an effective succession plan should be maintained for board and senior management.4
Both appointments and succession plans should be based on merit and objective criteria5
and, within this context, should promote diversity of gender, social and ethnic backgrounds,
cognitive and personal strengths.

K. The board and its committees should have a combination of skills, experience and knowledge.
Consideration should be given to the length of service of the board as a whole and membership
regularly refreshed.

L. Annual evaluation of the board should consider its composition, diversity and how effectively
members work together to achieve objectives. Individual evaluation should demonstrate
whether each director continues to contribute effectively.

9 UK Corporate Governance Code 2018

21. There should be a formal and rigorous annual evaluation of the
performance of the board, its committees, the chair and individual
directors. The chair should consider having a regular externally
facilitated board evaluation. In FTSE 350 companies this should
happen at least every three years. The external evaluator should be
identified in the annual report and a statement made about any other
connection it has with the company or individual directors.

22. The chair should act on the results of the evaluation by recognising
the strengths and addressing any weaknesses of the board. Each
director should engage with the process and take appropriate action
when development needs have been identified.

23. The annual report should describe the work of the nomination
committee, including:
• the process used in relation to appointments, its approach to

succession planning and how both support developing a diverse
pipeline;

• how the board evaluation has been conducted, the nature and
extent of an external evaluator’s contact with the board and
individual directors, the outcomes and actions taken, and how it
has or will influence board composition;

• the policy on diversity and inclusion, its objectives and linkage to
company strategy, how it has been implemented and progress on
achieving the objectives; and

• the gender balance of those in the senior management6 and their
direct reports.

6 See footnote 4.

10Financial Reporting Council

4 AUDIT, RISK AND INTERNAL
CONTROL

Provisions

24. The board should establish an audit committee of independent
non-executive directors, with a minimum membership of three, or in
the case of smaller companies, two.8 The chair of the board should
not be a member. The board should satisfy itself that at least one
member has recent and relevant financial experience. The committee
as a whole shall have competence relevant to the sector in which the
company operates.

25. The main roles and responsibilities of the audit committee should
include:
• monitoring the integrity of the financial statements of the company

and any formal announcements relating to the company’s
financial performance, and reviewing significant financial reporting
judgements contained in them;

• providing advice (where requested by the board) on whether the
annual report and accounts, taken as a whole, is fair, balanced
and understandable, and provides the information necessary for
shareholders to assess the company’s position and performance,
business model and strategy;

• reviewing the company’s internal financial controls and internal
control and risk management systems, unless expressly addressed
by a separate board risk committee composed of independent
non-executive directors, or by the board itself;

• monitoring and reviewing the effectiveness of the company’s
internal audit function or, where there is not one, considering
annually whether there is a need for one and making a
recommendation to the board;

Principles
M. The board should establish formal and transparent policies and procedures to ensure the

independence and effectiveness of internal and external audit functions and satisfy itself on the
integrity of financial and narrative statements.7

N. The board should present a fair, balanced and understandable assessment of the company’s
position and prospects.

O. The board should establish procedures to manage risk, oversee the internal control framework,
and determine the nature and extent of the principal risks the company is willing to take in order
to achieve its long-term strategic objectives.

7 The board’s responsibility to present a fair, balanced
and understandable assessment extends to interim
and other price-sensitive public records and reports
to regulators, as well as to information required to be
presented by statutory instruments.

8 A smaller company is one that is below the FTSE 350
throughout the year immediately prior to the reporting
year.

11 UK Corporate Governance Code 2018

• conducting the tender process and making recommendations to
the board, about the appointment, reappointment and removal of
the external auditor, and approving the remuneration and terms of
engagement of the external auditor;

• reviewing and monitoring the external auditor’s independence and
objectivity;

• reviewing the effectiveness of the external audit process, taking
into consideration relevant UK professional and regulatory
requirements;

• developing and implementing policy on the engagement of the
external auditor to supply non-audit services, ensuring there is
prior approval of non-audit services, considering the impact this
may have on independence, taking into account the relevant
regulations and ethical guidance in this regard, and reporting to
the board on any improvement or action required; and

• reporting to the board on how it has discharged its responsibilities.
26. The annual report should describe the work of the audit committee,

including:
• the significant issues that the audit committee considered relating

to the financial statements, and how these issues were addressed;
• an explanation of how it has assessed the independence and

effectiveness of the external audit process and the approach
taken to the appointment or reappointment of the external auditor,
information on the length of tenure of the current audit firm, when a
tender was last conducted and advance notice of any retendering
plans;

• in the case of a board not accepting the audit committee’s
recommendation on the external auditor appointment,
reappointment or removal, a statement from the audit committee
explaining its recommendation and the reasons why the board
has taken a different position (this should also be supplied in any
papers recommending appointment or reappointment);

• where there is no internal audit function, an explanation for the
absence, how internal assurance is achieved, and how this affects
the work of external audit; and

• an explanation of how auditor independence and objectivity are
safeguarded, if the external auditor provides non-audit services.

27. The directors should explain in the annual report their responsibility
for preparing the annual report and accounts, and state that they
consider the annual report and accounts, taken as a whole, is
fair, balanced and understandable, and provides the information
necessary for shareholders to assess the company’s position,
performance, business model and strategy.

12Financial Reporting Council

28. The board should carry out a robust assessment of the company’s
emerging and principal risks.9 The board should confirm in the
annual report that it has completed this assessment, including a
description of its principal risks, what procedures are in place to
identify emerging risks, and an explanation of how these are being
managed or mitigated.

29. The board should monitor the company’s risk management and
internal control systems and, at least annually, carry out a review of
their effectiveness and report on that review in the annual report. The
monitoring and review should cover all material controls, including
financial, operational and compliance controls.

30. In annual and half-yearly financial statements, the board should
state whether it considers it appropriate to adopt the going concern
basis of accounting in preparing them, and identify any material
uncertainties to the company’s ability to continue to do so over a
period of at least twelve months from the date of approval of the
financial statements.

31. Taking account of the company’s current position and principal risks,
the board should explain in the annual report how it has assessed
the prospects of the company, over what period it has done so and
why it considers that period to be appropriate. The board should
state whether it has a reasonable expectation that the company will
be able to continue in operation and meet its liabilities as they fall
due over the period of their assessment, drawing attention to any
qualifications or assumptions as necessary.

9 Principal risks should include, but are not necessarily
limited to, those that could result in events or
circumstances that might threaten the company’s
business model, future performance, solvency or
liquidity and reputation. In deciding which risks
are principal risks companies should consider the
potential impact and probability of the related events
or circumstances, and the timescale over which they
may occur.

13 UK Corporate Governance Code 2018

5 REMUNERATION

Provisions

32. The board should establish a remuneration committee of independent
non-executive directors, with a minimum membership of three,
or in the case of smaller companies, two.11 In addition, the chair
of the board can only be a member if they were independent on
appointment and cannot chair the committee. Before appointment
as chair of the remuneration committee, the appointee should have
served on a remuneration committee for at least 12 months.

33. The remuneration committee should have delegated responsibility
for determining the policy for executive director remuneration and
setting remuneration for the chair, executive directors and senior
management.12 It should review workforce13 remuneration and
related policies and the alignment of incentives and rewards with
culture, taking these into account when setting the policy for
executive director remuneration.

34. The remuneration of non-executive directors should be determined
in accordance with the Articles of Association or, alternatively, by the
board. Levels of remuneration for the chair and all non-executive
directors should reflect the time commitment and responsibilities
of the role. Remuneration for all non-executive directors should not
include share options or other performance-related elements.

35. Where a remuneration consultant is appointed, this should be the
responsibility of the remuneration committee. The consultant should
be identified in the annual report alongside a statement about any
other connection it has with the company or individual directors.
Independent judgement should be exercised when evaluating
the advice of external third parties and when receiving views from
executive directors and senior management.14

10 See footnote 4.

Principles
P. Remuneration policies and practices should be designed to support strategy and

promote long-term sustainable success. Executive remuneration should be aligned to company
purpose and values, and be clearly linked to the successful delivery of the company’s long-term
strategy.

Q. A formal and transparent procedure for developing policy on executive remuneration and
determining director and senior management10 remuneration should be established. No director
should be involved in deciding their own remuneration outcome.

R. Directors should exercise independent judgement and discretion when authorising remuneration
outcomes, taking account of company and individual performance, and wider circumstances.

11 See footnote 8.

12 See footnote 4.

13 See the Guidance on Board Effectiveness Section 5
for a description of ‘workforce’ in this context.

14 See footnote 4.

14Financial Reporting Council

36. Remuneration schemes should promote long-term shareholdings by
executive directors that support alignment with long-term shareholder
interests. Share awards granted for this purpose should be released
for sale on a phased basis and be subject to a total vesting and
holding period of five years or more. The remuneration committee
should develop a formal policy for post-employment shareholding
requirements encompassing both unvested and vested shares.

37. Remuneration schemes and policies should enable the use of
discretion to override formulaic outcomes. They should also include
provisions that would enable the company to recover and/or withhold
sums or share awards and specify the circumstances in which it
would be appropriate to do so.

38. Only basic salary should be pensionable. The pension contribution
rates for executive directors, or payments in lieu, should be aligned
with those available to the workforce. The pension consequences
and associated costs of basic salary increases and any other changes
in pensionable remuneration, or contribution rates, particularly for
directors close to retirement, should be carefully considered when
compared with workforce arrangements.

39. Notice or contract periods should be one year or less. If it is
necessary to offer longer periods to new directors recruited from
outside the company, such periods should reduce to one year or less
after the initial period. The remuneration committee should ensure
compensation commitments in directors’ terms of appointment do
not reward poor performance. They should be robust in reducing
compensation to reflect departing directors’ obligations to mitigate
loss.

40. When determining executive director remuneration policy and
practices, the remuneration committee should address the following:
• clarity – remuneration arrangements should be transparent

and promote effective engagement with shareholders and the
workforce;

• simplicity – remuneration structures should avoid complexity and
their rationale and operation should be easy to understand;

• risk – remuneration arrangements should ensure reputational and
other risks from excessive rewards, and behavioural risks that
can arise from target-based incentive plans, are identified and
mitigated;

• predictability – the range of possible values of rewards to individual
directors and any other limits or discretions should be identified
and explained at the time of approving the policy;

15 UK Corporate Governance Code 2018

• proportionality – the link between individual awards, the delivery
of strategy and the long-term performance of the company should
be clear. Outcomes should not reward poor performance; and

• alignment to culture – incentive schemes should drive behaviours
consistent with company purpose, values and strategy.

41. There should be a description of the work of the remuneration
committee in the annual report, including:
• an explanation of the strategic rationale for executive directors’

remuneration policies, structures and any performance metrics;
• reasons why the remuneration is appropriate using internal and

external measures, including pay ratios and pay gaps;
• a description, with examples, of how the remuneration committee

has addressed the factors in Provision 40;
• whether the remuneration policy operated as intended in terms of

company performance and quantum, and, if not, what changes
are necessary;

• what engagement has taken place with shareholders and the
impact this has had on remuneration policy and outcomes;

• what engagement with the workforce has taken place to explain
how executive remuneration aligns with wider company pay policy;
and

• to what extent discretion has been applied to remuneration
outcomes and the reasons why.

FINANCIAL REPORTING COUNCIL
8TH FLOOR
125 LONDON WALL
LONDON EC2Y 5AS

+44 (0)20 7492 2300

www.frc.org.uk

Financial Reporting Council

http://www.frc.org.uk

__MACOSX/._2018-UK-Corporate-Governance-Code-FINAL

公司名字

__MACOSX/._公司名字

ACC3017 ES1 Assessment Brief 2020-21(1) x
Assessment Brief

Module Name: Corporate Governance

Module Code

Level

Credit Value

Module Leader

ACC3017

6

20

Dr Stuart Farquhar

Assessment title:

ES1: Essay

Weighting:

50%

Submission dates:

Monday 18th January 2021

Feedback and Grades due:

Please see NILE under Assessment Information

Please read this assessment brief in its entirety before starting work on the Assessment Task.

The Assessment Task
The assessment focuses on limited companies’ compliance with codes of corporate governance.

As a risk and compliance analyst, you have been asked to complete a review of a company listed on the FTSE100 index as of September 2020 as it complies with the 2018 UK Code of Corporate Governance. Your company will be allocated to you in the first two weeks of the module and the list will be added to the NILE site. Each student will be allocated a different company. During the module you will be able to and expected to use your company in class activities both individually and in small groups with your peers to help you develop your understanding of the requirements of the assessment. To undertake the assessment, you will need to obtain/download a copy of your company’s most recent annual report (2019 or 2020) within which there will be a section on Governance. This is the pertinent section of the report with which you will need to become very familiar.

Using your company’s corporate governance report, critically review the compliance of your company based on the following criteria:

1. Discuss the firm’s relationships with its stakeholders: Assess the extent of the company communications with stakeholders in terms of culture, company’s purpose, values, and strategy. Justify if the compliance to code requirements is evidenced. In the implications section, drawing on academic theory and evidence, critically evaluate whether your company’s approach is effective. (Approximately 200 words)

The answers should be structured as follows:

Company purpose and communication with shareholders

Approach and Justification

Did the company comply with the code? Explain and justify (using evidence from the company report and the code)

Implications

Drawing on academic theory and empirical evidence, critically evaluate whether your company’s approach is effective.

Communication with stakeholders (Culture, purpose and strategy

2. A. Evaluate your company’s approach to ensuring effective leadership as suggested by the UK Code of Corporate Governance. Does the company have a separate CEO-Chair or CEO-Chair Duality? Using academic theory justify the approach of your company. In the implications section, drawing on academic theory and evidence critically evaluate whether the separation of CEO-chair is important to financial performance. (Approximately 200 words)
The answers should be structured as follows:

Board Characteristics

Approach and Justification

Did the company comply with the code? Explain (using evidence from the company report and the code) and justify (using academic theory)

Implications

Drawing on academic theory and evidence critically evaluate whether the separation of CEO-chair is important to firm performance.

Separated Roles of CEO/Chair

Yes/No

2. B. Discuss the extent of your company’s compliance with the requirements for board independence? In the implications section, using academic theory and evidence critically appraise the importance of independence on board performance. (Approximately 200 words)

The answers should be structured as follows:

Board Characteristics

Approach and Justification

Did the company comply with the code? Explain (using evidence from the company report and the code) and justify (using academic theory).

Implications

Using academic theory and empirical evidence critically appraise the importance of board independence on board performance.

Independence

Proportion of independent board members

3. Assess your company’s adherence to the composition, succession, and evaluation principles, by critically assessing the extent of your company’s compliance to board evaluation. In the implications section, drawing on empirical evidence in the academic literature appraise the importance of board evaluation on improving board effectiveness and company financial performance. Review your company’s case based on your analysis. (Approximately 300 words)
The answers should be structured as follows:

Accountability Components

Approach and Justification

Did the company comply with the code? Explain and justify (using evidence from the company report and the code).

Implications

Using empirical evidence in the academic literature appraise the importance of board evaluation on improving board effectiveness and company financial performance. Review your company’s case based on your analysis.

Board Evaluation

How often does the board undertake an evaluation of the board?

Is there an external evaluation? Yes/No

4. Investigate your company’s approach to audit, risk, and internal control by examining its compliance to external auditor rotations. In the implications section, using academic theory and empirical evidence critically discuss the importance of external auditor rotation/independence on company exposure to risk. Drawing on the findings from the academic literature, evaluate the case of your company. (Approximately 300 words)
The answers should be structured as follows:

Accountability Components

Approach and Justification

Did the company comply with the code? Explain and justify (using evidence from the company report and the code).

Implications

Using academic theory and empirical evidence critically discuss the importance of external auditor rotation/independence on company exposure to risk. Drawing on the findings from the academic literature, evaluate the case of your company.

External Auditors

Who are the auditors of your company?

How long have they been the auditors?

How many years is their contract?

5. Detail the structure of remuneration for the CEO for the past two years (either 2020 and 2019 OR 2019 and 2018) in terms of the proportion of total remuneration/pay for each of the following elements: Fixed Pay (includes Salary, benefits & pension); Annual Bonus; Long-erm Incentive Plan (LTIP). Explain the approach to remuneration and using academic theory justify the approach taken by the company. In the implications section, compare and contrast the relationship between remuneration and firm performance with the empirical evidence in the academic literature. Which of the three theories (agency, managerial entrenchment/power, and institutional theory) best explains your company’s approach? (Approximately 400 words)
The answers should be structure as follows:

Remuneration Components

Approach and Justification

Explain the approach to remuneration and using academic theory justify the approach taken by the company.

Implications

Compare and contrast the relationship between remuneration and firm performance with the empirical evidence in the academic literature. Which of the three theories (agency, managerial entrenchment/power, and institutional theory) best explains your company’s approach?

Structure of Remuneration

Most recent year (either 2020 or 2019)
Total Pay – 100%
Fixed Pay – %
Annual Bonus – %
LTIP – %
Previous year (either 2019 or 2018)
Total Pay – 100%
Fixed Pay – %
Annual Bonus – %
LTIP – %

6. Conclusion – Write a conclusion that summarises the extent of your company’s compliance with all the requirements of the UKs Code of Corporate Governance. Drawing on the academic literature assess whether adherence to the code or not is important to the performance of the company. (Approximately 300 words)

Word limit

The maximum word limit for this assessment is 2000 words.

Where the submission exceeds the stipulated word limit by more than 10%, the submission will only be marked up to and including the additional 10%. Anything over this will not be included in the final grade for the assessment item. Abstracts, bibliographies, reference lists, appendices and footnotes are excluded from any word limit requirements

Learning Outcomes
On successful completion of this assessment, you will be able to:
· Level of understanding, analysis, and application to your company (30%)
· Level of justification, evaluation, and appraisal (30%)
· Quality of argument, synthesis, and conclusion (30%)
· Professional and academic quality of written work and accuracy of referencing (10%)

Your grade will depend on the extent to which you meet these learning outcomes in the way relevant for this assessment. Please see the grading rubric on NILE for further details of the criteria against which you will be assessed.

Assessment Criteria

· Level of understanding, analysis, and application to your company (30%)
· Level of justification, evaluation, and appraisal (30%)
· Quality of argument, synthesis, and conclusion (30%)
· Professional and academic quality of written work and accuracy of referencing (10%)
Assessment Support
Specific support sessions for this assessment will be provided by the module team and notified through NILE. You can also access individual support and guidance for your assessments from Library and Learning Services. Visit the Skills Hub to access this support and to discover the online support also available for assessments and academic skills.
Academic Integrity and Misconduct
Unless this is a group assessment, the work you produce must be your own, with work taken from any other source properly referenced and attributed. For the avoidance of doubt this means that it is an infringement of academic integrity and, therefore, academic misconduct to ask someone else to carry out all or some of the work for you, whether paid or unpaid, or to use the work of another student whether current or previously submitted.

For further guidance on what constitutes plagiarism, contract cheating or collusion, or any other infringement of academic integrity, please read the University’s Academic Integrity and Misconduct Policy. Also useful resources to help with understanding academic integrity are available from UNPAC .

N.B. The penalties for academic misconduct are severe and can include failing the assessment, failing the module and expulsion from the university.

Assessment Submission
To submit your work, please go to the ‘Submit your work’ area on the NILE site and use the relevant submission point to upload your report. The deadline for this is 11.59pm (UK local time) on the date of submission. Please note that essays and text-based reports should be submitted as word documents and not PDFs or Mac files.

Written work submitted to TURNITIN will be subject to anti-plagiarism detection software. Turnitin checks student work for possible textual matches against internet available resources and its own proprietary database. Work

When you upload your work correctly to TURNITIN you will receive a receipt which is your record and proof of submission. If your assessment is not submitted to TURNITIN, rather than a receipt, you will see a green banner at the top of the screen that denotes successful submission.

N.B Work emailed directly to your tutor will not be marked.

Late submission of work
For first sits, if an item of assessment is submitted late and an extension has not been granted, the following will apply:

· Within one week of the original deadline – work will be marked and returned with full feedback and awarded a maximum bare pass grade.
· More than one week from original deadline – grade achievable LG (L indicating late).

For resits there are no allowances for work submitted late and it will be treated as a non-submission.

Please see the Assessment and Feedback Policy for full information on the processes related to assessment, grading and feedback, including anonymous grading. You will also find the generic grading criteria for achievement at University Grading Criteria. Also explained there are the meanings of the various G grades at the bottom of the grading scale including LG mentioned above.

Extensions
The University of Northampton’s general policy with regard to extensions is to be supportive of students who have genuine difficulties, but not against pressures of work that could have reasonably been anticipated.

For full details please refer to the Extensions Policy. Extensions are only available for first sits – they are not available for resits.

Mitigating Circumstances
For guidance on Mitigating circumstances please go to Mitigating Circumstances where you will find detailed guidance on the policy as well as guidance and the form for making an application.

Please note, however, that an application to defer an assessment on the grounds of mitigating circumstances should normally be made in advance of the submission deadline or examination date.

Feedback and Grades
These can be accessed through clicking on the Feedback and Grades tab on NILE. Feedback will be provided by a rubric with summary comments.

2

ES1- Marking Rubric

 Levels of Achievement

Criteria

No Submission / no evidence

Fail

Pass

Commended

Merit

Distinction

Level of understanding, analysis, and application to your company

(30%)

0 points
Non-Submission

1 to 11 points
Weak to poor understanding and analysis of the codes of corporate governance. Weak to poor understanding of theories of corporate governance. Weak to poor application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

12 to 14 points
Satisfactory understanding and analysis of the codes of corporate governance.
Satisfactory understanding of theories of corporate governance. Satisfactory application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

15 to 17 points
Sound understanding and analysis of the codes of corporate governance. Sound understanding of theories of corporate governance. Sound application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

18 to 20 points
High quality understanding and analysis of the codes of corporate governance. High quality understanding of theories of corporate governance. High quality application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

21 to 30 points
Very high-quality understanding and analysis of the codes of corporate governance. Very high-quality understanding of theories of corporate governance. Very high-quality application to your company with regard to the company purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration, and your company’s compliance to the UKs Code of Corporate Governance.

Level of justification, evaluation, and/or appraisal

(30%)

0 points
Non-Submission

1 to 11 points
Weak to poor level of justification, evaluation, and appraisal. Little to no attempt to justify your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Little or no evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Little to no evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

12 to 14 points
Satisfactory level of justification, evaluation, and appraisal. Satisfactory justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Satisfactory evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Satisfactory evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

15 to 17 points
Sound level of justification, evaluation, and appraisal. Sound justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Sound evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Sound evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

18 to 20 points
High quality level of justification, evaluation, and appraisal. High quality justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. High quality evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. High quality evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance.

21 to 30 points
Very high-quality level of justification, evaluation, and appraisal. Very high-quality justification of your company’s approach to the purpose and communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk, CEO remuneration. Very high-quality evaluation and/or appraisal of the academic theory and evidence on listed companies’ approach to communication with stakeholders, effective leadership, board independence, board evaluation, audit and risk. Very high-quality evaluation and/or appraisal of your company’s compliance with the UK Code of Corporate Governance

Quality of argument, synthesis, and conclusion

(30%)

0 points
Non-Submission

1 to 11 points
Weak to poor level of argument with little to no support from academic theory and evidence. Weak to poor synthesis of the material. Weak to poor or no conclusion

12 to 14 points
Satisfactory level of argument with some acceptable support from academic theory and evidence. Satisfactory synthesis of the material. Satisfactory conclusion

15 to 17 points
Sound level of argument with commendable support from academic theory and evidence. Sound synthesis of the material. Sound conclusion

18 to 20 points
High quality level of argument with very good support from academic theory and evidence. High quality synthesis of the material. High quality conclusion

21 to 30 points
Very high-quality level of argument with excellent to outstanding to exceptional support from academic theory and evidence. Very high-quality synthesis of the material. Very high-quality conclusion

Professional and academic quality of written work and accuracy of referencing

(10%)

0 points
Non-Submission

1 to 3 points
Poor quality of academic writing, with many spelling, grammar and other errors demonstrating a lack of professional attention to the work. Poor or no referencing. Fails to apply the Harvard system of referencing.

4 points
Satisfactory quality of academic writing, with some spelling, grammar and other errors demonstrating a satisfactory professional attention to the work. Satisfactory referencing. A satisfactory application of the Harvard system of referencing.

5 points
Sound quality of academic writing, with few spelling, grammar and other errors demonstrating a sound professional attention to the work. Sound referencing. A sound application of the Harvard system of referencing.

6 points
High quality of academic writing, with minor spelling, grammar and other errors demonstrating a high-quality professional attention to the work. High quality referencing. A high-quality application of the Harvard system of referencing.

7 to 10 points
Very high-quality of academic writing, with accurate spelling, grammar and few other errors demonstrating a very high-quality professional attention to the work. Very high-quality referencing. A very high-quality application of the Harvard system of referencing.

__MACOSX/._ACC3017 ES1 Assessment Brief 2020-21(1) x

Assessment Guidance.pptx

ES1 Assignment: Structured Essay
ACC3017 Corporate Governance
Dr Stuart Farquhar

1

Session Outcomes

2

Understand the requirements of the first assignment, es1

01

Assessment Brief
As a risk and compliance analyst, you have been asked to complete a review of a company listed on the FTSE100 index as of September 2020 as it complies with the 2018 UK Code of Corporate Governance. Your company will be allocated to you in the first two weeks of the module and the list will be added to the NILE site. Each student will be allocated a different company. During the module you will be able to and expected to use your company in class activities both individually and in small groups with your peers to help you develop your understanding of the requirements of the assessment. To undertake the assessment, you will need to obtain/download a copy of your company’s most recent annual report (2019 or 2020) within which there will be a section on Governance. This is the pertinent section of the report with which you will need to become very familiar.

Assessment Task – Question 1
Using your company’s corporate governance report, critically review the compliance of your company based on the following criteria:
Discuss the firm’s relationships with its stakeholders: Assess the extent of the company communications with stakeholders in terms of culture, company’s purpose, values, and strategy. Justify if the compliance to code requirements is evidenced. In the implications section, drawing on academic theory and evidence, critically evaluate whether your company’s approach is effective. (Approximately 200 words)

The Answer Should be Structured as Follows (In Table Format with 3 Headed Columns)

Company purpose and communication with shareholders Approach and Justification
Did the company comply with the code? Explain and justify (using evidence from the company report and the code) Implications
Drawing on academic theory and empirical evidence, critically evaluate whether your company’s approach is effective.

Communication with stakeholders (Culture, purpose and strategy    

Any Questions 1?

Assessment Task – Question 2A
A. Evaluate your company’s approach to ensuring effective leadership as suggested by the UK Code of Corporate Governance. Does the company have a separate CEO-Chair or CEO-Chair Duality? Using academic theory justify the approach of your company. In the implications section, drawing on academic theory and evidence critically evaluate whether the separation of CEO-chair is important to financial performance. (Approximately 200 words)

The Answer to Q2A Should be Structured as Follows:

Board Characteristics
  Approach and Justification
Did the company comply with the code? Explain (using evidence from the company report and the code) and justify (using academic theory) Implications
Drawing on academic theory and evidence critically evaluate whether the separation of CEO-chair is important to firm performance.

Separated Roles of CEO/Chair
Yes/No  
   

Any Questions 2A?

Assessment Task – Question 2B
B. Discuss the extent of your company’s compliance with the requirements for board independence? In the implications section, using academic theory and evidence critically appraise the importance of independence on board performance. (Approximately 200 words)

The Answer to Q2B Should be Structured as Follows:

Board Characteristics
  Approach and Justification
Did the company comply with the code? Explain (using evidence from the company report and the code) and justify (using academic theory). Implications
Using academic theory and empirical evidence critically appraise the importance of board independence on board performance.

Independence
Proportion of independent board members  
   

Any Questions 2B?

Assessment Task – Question 3
Assess your company’s adherence to the composition, succession, and evaluation principles, by critically assessing the extent of your company’s compliance to board evaluation. In the implications section, drawing on empirical evidence in the academic literature appraise the importance of board evaluation on improving board effectiveness and company financial performance. Review your company’s case based on your analysis. (Approximately 300 words)

The Answer to Q3 Should be Structured as Follows:

Accountability Components
  Approach and Justification
Did the company comply with the code? Explain and justify (using evidence from the company report and the code). Implications
Using empirical evidence in the academic literature appraise the importance of board evaluation on improving board effectiveness and company financial performance. Review your company’s case based on your analysis.

Board Evaluation
How often does the board undertake an evaluation of the board?
 
Is there an external evaluation? Yes/No  
   

Any Questions 3?

Assessment Task – Question 4
Investigate your company’s approach to audit, risk, and internal control by examining its compliance to external auditor rotations. In the implications section, using academic theory and empirical evidence critically discuss the importance of external auditor rotation/independence on company exposure to risk. Drawing on the findings from the academic literature, evaluate the case of your company. (Approximately 300 words)

The Answer to Q4 Should be Structured as Follows:

Accountability Components
  Approach and Justification
Did the company comply with the code? Explain and justify (using evidence from the company report and the code). Implications
Using academic theory and empirical evidence critically discuss the importance of external auditor rotation/independence on company exposure to risk. Drawing on the findings from the academic literature, evaluate the case of your company.
 

External Auditors
Who are the auditors of your company?
How long have they been the auditors?
How many years is their contract?  
   

Any Questions 4?

Assessment Task – Question 5
Detail the structure of remuneration for the CEO for the past two years (either 2020 and 2019 OR 2019 and 2018) in terms of the proportion of total remuneration/pay for each of the following elements: Fixed Pay (includes Salary, benefits & pension); Annual Bonus; Long-term Incentive Plan (LTIP). Explain the approach to remuneration and using academic theory justify the approach taken by the company. In the implications section, compare and contrast the relationship between remuneration and firm performance with the empirical evidence in the academic literature. Which of the three theories (agency, managerial entrenchment/power, and institutional theory) best explains your company’s approach? (Approximately 400 words)

Answer to Question 5 Should be Structured as Shown On The Next Slide

Remuneration Components
  Approach and Justification
Explain the approach to remuneration and using academic theory justify the approach taken by the company. Implications
Compare and contrast the relationship between remuneration and firm performance with the empirical evidence in the academic literature. Which of the three theories (agency, managerial entrenchment/power, and institutional theory) best explains your company’s approach?

Structure of Remuneration
Most recent year (either 2020 or 2019)
Total Pay – 100%
Fixed Pay – %
Annual Bonus – %
LTIP – %
Previous year (either 2019 or 2018)
Total Pay – 100%
Fixed Pay – %
Annual Bonus – %
LTIP – %  
   

Any Questions 5?

Assessment Task – Conclusion
Write a conclusion that summarises the extent of your company’s compliance with all the requirements of the UKs Code of Corporate Governance. Drawing on the academic literature assess whether adherence to the code or not is important to the performance of the company. (Approximately 300 words)

Any Questions 6?

Learning Outcomes
On successful completion of this assessment, you will be able to:
Critically appraise the role of governance and its function in the organisation
Apply professional values and judgments to case studies and scenarios through an ethical framework, in compliance with relevant professional codes, laws and regulations.
Apply ethical standards to evaluate board performance and decision-making processes in listed companies.
Synthesise information by bringing together various aspects of corporate governance and present interpretations clearly and logically.

Assessment Criteria
Level of understanding, analysis, and application to your company (30%)
Level of justification, evaluation, and appraisal (30%)
Quality of argument, synthesis, and conclusion (30%)
Professional and academic quality of written work and accuracy of referencing (10%)
See Marking Rubric in the Assessment Brief on the Module NILE site for detail regarding marking criteria

Assessment Advice
Read Widely – Especially Academic Journals and Books
Support all arguments with theory and evidence – Citations to appropriate references is essential.
Never make unsubstantiated claims or assertions.
Take care with your writing to ensure you use good English. Check spelling, grammar, tense usage, et al.
Provide a reference list using Harvard System https://cpb-eu-w2.wpmucdn.com/mypad.northampton.ac.uk/dist/d/6334/files/2018/01/Harvard-Referencing-Guide-ed-6-2017-2gl0fxy

Any Final Questions?

__MACOSX/._Assessment Guidance.pptx

Governance-Report-2020-2611

REVIEW OF CORPORATE
GOVERNANCE REPORTING
NOVEMBER 2020

Financial Reporting Council

The FRC’s purpose is to serve the public
interest by setting high standards of corporate
governance, reporting and audit and by holding
to account those responsible for delivering
them. The FRC sets the UK Corporate
Governance and Stewardship Codes and UK
standards for accounting and actuarial work;
monitors and takes action to promote the
quality of corporate reporting; and operates
independent enforcement arrangements for
accountants and actuaries. As the Competent
Authority for audit in the UK the FRC sets
auditing and ethical standards and monitors and
enforces audit quality.

The FRC does not accept any liability to any
party for any loss, damage or costs howsoever
arising, whether directly or indirectly, whether
in contract, tort or otherwise from any action
or decision taken (or not taken) as a result of
any person relying on or otherwise using this
document or arising from any omission from it.

© The Financial Reporting Council Limited 2020
The Financial Reporting Council Limited is a
company limited by guarantee. Registered in
England number 2486368. Registered Office:
8th Floor, 125 London Wall, London EC2Y 5AS

ABOUT THE FRC

1

2

3

4

5

FOREWORD

CONTENTS

1

2

3

4

6

22

40CONCLUSION

REPORTING EXPECTATIONS

MAIN FINDINGS

A. CODE COMPLIANCE

B. LEADERSHIP

C. STAKEHOLDER ENGAGEMENT

EXECUTIVE SUMMARY

1Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

However, it is disappointing to see that – overall –
reporting does not demonstrate the high quality of
governance that the FRC expects. This cannot be put
down to dealing with the pandemic, as a large proportion
of annual reporting would have been completed before
COVID-19 had begun to affect our lives. We are aware
that stakeholders report that they will support companies
that ‘did the right thing’ in responding to the pandemic.
Much of what we have analysed is formulaic. Too often
the objective of reporting appears to be to claim strict
compliance with the Code concentrating on achieving
box-ticking compliance, at the expense of effective
governance and reporting. This approach is a disservice to
the interests of shareholders and wider stakeholders, and
ultimately is not in the public interest; it undermines trust.
Worryingly, while some companies have sought to claim
full compliance, we found on closer inspection that this
was not the case.
The Code establishes best practice, but importantly it
offers flexibility. This flexibility is an opportunity, not a
threat; it allows boards to take a thoughtful approach to
governance. Where companies depart from the Provisions
of the Code they need to provide clear and compelling
explanations for why the approach taken is the right one
for the particular circumstances of the company.
It seems that too often, boards appear reticent to use this
opportunity. This is also highlighted in the FCA’s recent

1. FOREWORD

“I am very proud of the UK’s international reputation
for good corporate governance. This must not lead to
complacency; the events of this year have reminded us
of that.
The quality of governance is tested in a crisis. Maintaining
integrity in board decision-making, the management of
risk, and effective engagement with all stakeholders,
are essential for maintaining the trust which attracts
the investments on which our economy relies. Learning
from the corporate decisions and actions taken during
the pandemic will much better enable us to build a
sustainable and resilient economy in the future.
The most recent UK Corporate Governance Code
recognises much more clearly the wider economic and
social benefits of good governance, which arguably had
been overlooked.
We saw some examples of excellence in reporting. This
often involved the setting of ambitious goals, and a
clear communication of progress. We have used these
examples to inform our expectations for next year. One
of the improvements we recommend is better quality
engagement with shareholders and wider stakeholders,
making sure that dialogue is effective by considering
views from each party, and that boards can demonstrate
that they have listened through their decision-making.
Not only will this build a better understanding of different
company approaches, it will build trust.

analysis of corporate governance disclosures by listed
issuers.
I strongly encourage companies to review this approach
to reporting, particularly in the light of the events of this
year. Despite the severe hardships it has presented – and
I understand the continuing pressure that boards and
workforces are under – we can use this situation to bring
about lasting changes which will benefit us all in the long
term.
As we transition to becoming a new regulator – the Audit,
Reporting and Governance Authority – we expect to receive
further powers to engage with companies about the quality
of their governance reporting. We will do this constructively;
by working together we will be able to develop the quality of
reporting so that it achieves the highest standard for which
the UK is rightly known. However, where appropriate we will
call out poor behaviour.
The role of investors is crucial. Next year will see asset
managers and owners sign up to a new and more
demanding Stewardship Code; a Code which focusses
on the activities and outcomes of stewardship, bringing
sustainable benefits to the economy and wider society.
I strongly encourage companies and investors to recognise
the opportunities for progress offered by both Codes,
and to engage constructively to deliver the high quality
governance and stewardship needed for the future.”

SIR JON THOMPSON
CEO, FRC

2Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

2. EXECUTIVE SUMMARY
This is the first year in which all UK premium listed
companies reported on their application of the 2018 UK
Corporate Governance Code (Code).
In our Annual Review of the UK Corporate Governance
Code reporting, published in January 2020, we stated
that: “effectively applying the Principles is much more
important than a ‘tick box’ approach”. Our assessments
of reports this year now give us an evidence base to drive
forward better quality reporting. This is essential if investors
and other stakeholders are to evaluate the quality of
governance effectively.
As part of our assessment, we were looking for a high
standard of reporting which demonstrated that boards
had considered matters beyond process and reassessed
issues such as company purpose, culture, and strategy,
in order to set them at the heart of governance.
Whilst we have found examples of good reporting, overall,
we are disappointed with the response to the new Code.
The FRC’s analysis, together with assessments by third
parties, shows that the objective of too many companies
is to claim full compliance with the Code, which has led
to the ‘tick-box’ practices we have tried to discourage.
Too often companies who are not compliant with the
Code, do not declare non-compliance but offer vague
explanations, and continue this pattern year on year. This
approach demonstrates a disregard for implementing
good practice and questions whether the leadership of
the company is fully committed to good governance and
transparency.
A far better aim is to set out the approach to the
company’s application of the Code’s Principles, explain
why this approach is right for its individual circumstances

and, if necessary, what actions it has taken to mitigate
the impact of not following the Code. We welcome
explanations which demonstrate a thoughtful approach to
corporate governance, an approach which is unfortunately
lacking from too many of the reports that we have
assessed.
This is in line with the findings of the FCA in their report on
Corporate Governance Disclosures by Listed Issuers where
they set out how corporate governance disclosures could
be improved, especially when disclosing how the Principles
have been applied.
We were surprised that in many cases corporate
governance reporting was not coherent and cohesive.
For example, many companies stated the importance of
diversity and diverse boards but offered little explanation
in the way of evidence to support their assertions,
including: a lack of targets to improve diversity at the
board and executive committee levels; little or no
discussion of succession planning; and minimal reporting
on how board evaluations are leading to the development
of diverse talent pools. Many companies discussed
diversity and inclusion committees or LGBTQ+ networks
but did not describe the impact of such groups on the
company’s long-term success.
We reported in 2020 that more work was required on
purpose and culture. We were pleased to see that
reporting on both of these issues improved, but many
companies continue to set out a purpose that is more of
a marketing slogan. Many companies still appear to be
considering how to define purpose and embed culture
throughout the organisation. Work is required in terms
of monitoring culture, with only a minority of companies
setting out in detail how they plan to assess their culture
beyond the use of surveys and site visits.

Companies were better at commenting on stakeholder
engagement, but we are concerned about the reliance
on process and the lack of reporting on feedback
received and outcomes. In many cases, it was not clear
how issues were raised to board level, and how any
discussions of such matters affected decision-making.
This lack of evidence of any feedback also manifested
itself in relation to remuneration policies. We were
pleased to see that most companies had embraced
Code changes into their new remuneration policies
and many companies stated that they had considered
wider (workforce) remuneration when setting executive
remuneration polices. That said, we were concerned
to see that there was almost no discussion of how the
new policies had been debated with and explained to
shareholders and wider stakeholders.
As the impact of the COVID-19 pandemic was not
captured in most of the reports that we assessed, we
have not commented in any detail on this significant
issue in our report. Next year we will evaluate how well
companies responded.
In our research we assessed a sample of up to 100
companies. The sample included both FTSE100 and 250
companies, as well as Small Cap companies. In addition,
we considered third party reports on governance and
drew on statistics from external sources to show the
broader context. We also refer to our commissioned
reports on diversity, remuneration policies and workforce
engagement.
The report presents our findings and sets out the FRC’s
expectations for the future application of the Code and
reporting.

https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL

https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL

https://www.frc.org.uk/getattachment/53799a2d-824e-4e15-9325-33eb6a30f063/Annual-Review-of-the-UK-Corporate-Governance-Code,-Jan-2020_Final

https://www.frc.org.uk/getattachment/53799a2d-824e-4e15-9325-33eb6a30f063/Annual-Review-of-the-UK-Corporate-Governance-Code,-Jan-2020_Final

https://www.fca.org.uk/publication/primary-market/pmb-31-corporate-governance-disclosures-listed-issuers

3Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Corporate reporting is an effective tool to communicate the
company’s corporate governance standards, policies and
practices. It should be underpinned by the principles of
transparency, clarity and integrity, and give a true overview
of the company’s business model and operations, structure,
activities and performance.

Companies reporting against the Code are expected to
move away from boilerplate statements towards a more
meaningful narrative in support of their application of the
Code’s Principles and to report non-compliance with
Provisions. Use of examples is strongly encouraged, to
demonstrate application of any non-compliance with the
Code. Recognising that no one size fits all, the Code
should serve as a guide to good governance practice,
which companies ought to use to tell their unique story.

To help navigation through the Annual Report and
Accounts and ensure cohesion with the corporate
governance statement, companies should be using
signposting, linking different elements of the report,
with clear reference to the Code. The report needs to
be informative and understandable for all company
stakeholders.

The Code puts greater emphasis on companies’
relationships with their stakeholders, in line with
s.172 of Companies Act 2006 and strategic reporting
requirements. The FRC expects companies to report on
their engagement efforts with their stakeholders, which
should be conducted in an open manner. Reporting
should also include a discussion on how any received
feedback has informed company decisions and strategy.

Quality corporate reporting maintains the confidence of
company stakeholders by demonstrating the resilience
of the company business model, or flag the need for the

model to adapt. By providing evidence and examples
about statements and commitments in their reporting,
companies can be more accountable and thus gain the
trust of their stakeholder.

3. REPORTING EXPECTATIONS

As a result of this year’s review, we expect
improved reporting in the following ways:

Companies to have a well-defined purpose
and to clearly show the progress towards
achieving it

Discussion of the issues raised, topics
considered, and feedback received during
engagement with shareholders and employees

Clearly show the impact of engagement
with stakeholders, including shareholders,
on decision-making, strategy and long-term
success

Increased focus on assessing and monitoring
culture, including consideration of methods
and metrics used

Increased attention and better reporting of
succession planning, diversity and board
evaluation

Clearly show the impact of engagement with
shareholders on remuneration policy and
outcomes

Clearly show the impact of the engagement
within the workforce in relation to executive
remuneration policy

Strive for transparency, clarity and integrity

Use signposting, avoid boilerplate and ensure
cohesion

Tell a story about your company, avoiding a “tick
box” approach

Explain clearly and comprehensively when you
depart from the Code’s Provisions

Disclose impact of actions via use of examples

What to keep in mind when reporting:

4Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

4. MAIN FINDINGS
A. CODE COMPLIANCE

When following the Code, companies should apply
the Principles and report against the Provisions. This
section assesses the extent to which companies
reported compliance and non-compliance. We remind
companies that they should provide clear and detailed
explanations of any non-compliance with the Provisions.
We encourage companies to be fully transparent about
their reasons for non-compliance. This section does not
assess the application of the Principles; these matters are
examined in sections B and C.

COMPLIANCE STATEMENT
All but one company made a statement about Code
compliance. In the majority of cases the statement was
clear and to the point. However, for a few companies, the
statement was vague in relation to any Provisions that
had not been complied with.

I. Fully complied with the Code by applying the
Principles and reporting against the Provisions

II. Not complied with any of the Provisions, and
in such circumstances disclose the relevant
Provision(s)

We found a number of instances where non-compliance
is “hidden” through the use of ambiguous language and
often unnecessary signposting, which makes it difficult to
determine whether the Provisions have been complied with.

Financial Reporting Council

FRC expects that companies should be clear
and transparent about the Provisions of the Code
that they have not complied with. They should
clearly name these Provisions in their compliance
statement. They should also avoid the use of jargon
and ambiguous language and use signposting only
to point to the explanation.

To ensure transparency, companies should clearly
declare within the statement whether they have:

Declaring full compliance
From our sample of 100 companies, 58 (including 29
FTSE100 companies), have reported full compliance with
all the Provisions of the Code. There were also a number
of companies that disclosed non-compliance with more
than one Provision, and these are set out below:

0 4 8 12 16 20 24

21

1 Provision
2 Provisions
3 Provisions

4 Provisions
5 Provisions

12

6

1

2

Non-compliance with Provisions of the Code

No. of companies with non compliance of:

The Provisions that companies within our sample of 100
declared the most non-compliance against were:
• Provision 9

Chair independent on appointment
• Provision 38

Alignment of pension contributions
• Provision 19

Chair remaining in post beyond 9 years
• Provision 36

Share awards subject to total vesting and holding
periods of five years or more

• Provision 11
At least half the board should be independent

4

Provision No.

9

9 19 11

16

6

36

11

38

No. companies that declared non-compliance by
Provision

16
14
12
10

8
6
4
2
0

Declaring full compliance should mean that a company
has applied all the Principles and complied with all the
Provisions of the Code. If a Provision is not complied
with, a full and detailed explanation must be given.

5Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

FRC expects companies to report in a transparent
way any non-compliance with any Provisions of the
Code.

Explanations
For those that disclosed their non-compliance, too often
the explanation is boilerplate. For example, most of the
companies that declared non-compliance with Provision
9, regarding the chair’s independence, stated that this
was to retain the chair’s skills and experience. None of
those companies provided a meaningful justification of
the rationale.

Do
• Set the context and background
• Give a convincing rationale for the approach being taken
• Describe any mitigating actions
• Consider any risks
• Set out when the company intends to comply

(timescales)
• Ensure that the explanation is understandable and

persuasive

We are concerned that an unexpectedly high number
of companies in our sample claimed full compliance but
could not demonstrate this in their reports. For example,
43 of those companies did not report non-compliance
with Provision 38; pension contributions for directors were
neither currently aligned with the workforce, nor scheduled
to be aligned at a later date, or were not fully disclosed.
In the case of four companies the remuneration committee
had not developed a formal policy for post-employment
shareholding, but failed to report that they were not in
compliance with Provision 36. These figures are in line with
Grant Thornton’s finding that while 48 companies have
had their chair on the board for more than 9 years, only 31
of them reported non-compliance with Provision 19.
There may be many reasons why a company has taken
a different approach to achieving good governance
practice, this should be clearly stated in their reports.

• Assume the reader understands any background
• Just state that the board agreed with the deviation from

the Code
• Offer vague reasons for non-compliance

Don’t

An example of good explanation is “The chair has been
in post for 9 years, however, last year they began to lead
takeover discussions. These are complex discussions
and once completed will impact on our ability to achieve
our long term strategy. Unsatisfactory completion of
this process is set out as a principal risk. We expect
the completion of these negotiations to take a further
6 months. Following the completion of this process,
the senior independent director jointly with members
of the nomination committee (excluding the chair) will
commence the procedure of recruiting a new chair. Our
expectation is that a new chair will be appointed within 1
year.”

Last year we said: “Full strict compliance has never been
the aim, nor has it reflected the spirit, of the Code due
to the ‘comply or explain’ approach on the Provisions.
Detailed and comprehensive explanations offer the reader
a greater insight into how the company operates.”

Our view has not changed; we want companies to
maintain the high standards of the Code by taking the
good practice demonstrated within it, apply it to the
company and report the approach by use of detailed
explanations.

“We view good quality explanations as an effective
way to achieve compliance with the Code.”

Financial Reporting Council

FRC expects companies to provide a clear and
meaningful explanation of how a company’s actual
practices achieve good governance standards in
line with flexibility offered by the Code even though
they may not have fully complied with a Provision
of the Code.

We would like to remind companies of the elements of a
good explanation, as outlined below:

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6Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

“A well-defined purpose will help
companies to articulate their
business model, and develop their
strategy, operating practices and
approach to risk. Companies with
a clear purpose often find it easier
to engage with their workforce,
customers and the wider public.”
The FRC’s Guidance on Board
Effectiveness

B. LEADERSHIP

PURPOSE
Articulation of purpose

The Annual Report is the board’s responsibility. The
cohesiveness of the report and the detail set out within it
should demonstrate how good governance supports the
overall strategy.
This section of our review addresses issues as set out,
broadly, in sections 1, 2 and 3 of the Code. We have
considered how companies applied the Principles of
these sections, reporting on purpose, culture and values.
We have also considered the make-up of boards and
diversity, along with succession planning and board
evaluations. As the Code states, the board must set the
tone from the top and drive culture and change.

GUIDANCE
ON BOARD
EFFECTIVENESS
JULY 2018

Financial Reporting Council

Principle B states: “The board should establish the
company’s purpose, values and strategy, and
satisfy itself that these and its culture are aligned”

14
18

21

11

22

A company purpose matters for many reasons, not least
of which is that a clear explanation of purpose helps
boards make better strategic decisions. Purpose also
lays the foundations upon which a company can build
its future. Stakeholders consider company purpose in
many different ways; for example, investors may consider
purpose as part of their due diligence to help inform their
investment decisions.

Had a vague purpose that did not specifically articulate
why the company existed, the market segment they
operate in, their unique selling points, and/or how they
intend to achieve their purpose

Utilised a marketing slogan or conflated vision, values,
or their operations with their purpose, which is not in line
with the spirit of the Code

Disclosed a purpose that met one or two of these
elements

Incorporated most of these elements

Described a purpose that was clear about why they
specifically existed, their market segment, their USP, and
how they will achieve their purpose

Our research found that an overwhelming majority, 86%
of companies, disclosed a purpose statement, which
we welcome. However, the quality of those purpose
statements varied greatly. Of that 86%, 11% used a
marketing slogan or conflated vision, values, or their
operations with their purpose.
There are many contributors to the debate about how
companies should undertake the definition of their
purpose, and it is important that boards make their own
decisions based on their business model and strategy.
In our review last year, we noted that around half of our
sampled companies provided a purpose statement, but
also that many companies used a slogan or marketing
line. We expected to see significant improvements in
purpose disclosures in 2020.

Quality of purpose statements

Chart refers to the 86% of
companies that disclosed
their purpose statement.

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

7Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Our view is that a purpose must be simple to understand
and act as a reference point for decision making.

The purpose may contain the following elements

Why the company exists

What the company does/market in which
the company operates

What the company is seeking to achieve

How they will achieve that purpose

Purpose statements should not be any of the below
because each of them fulfils something different than a
company’s purpose:

The purpose should not be

Marketing slogans

Vision statements

Mission statements

Value statements

Operational descriptions

An example of a good purpose from a fictional company is:
“We exist to build furniture in an ethical and sustainable
way by sourcing our materials solely from carbon-neutral
certified suppliers”.

ANNUAL REVIEW OF
THE UK CORPORATE
GOVERNANCE CODE
JANUARY 2020

Our 2019 Annual Review of the
UK Corporate Governance Code

Business model reporting;
Risk and viability reporting
Where are we now?
October 2018

Financial Reporting Council

Lab’s Business model reporting;
Risk and viability reporting –
Where are we now? Report

“Our research found that a majority of companies,
62%, did not articulate a clear connection
between their purpose, values, and strategy
despite the good practice outlined in the Code.”

This purpose is clear (building furniture), describes the
market segment (furniture), what makes the company
unique (ethical and sustainable), and how they will
achieve it (sourcing only from carbon-neutral certified
suppliers).

In contrast, an example of a poor purpose from a fictional
company is:
“Enabling your life”.

This purpose is bad because it appears to be a
marketing slogan, it is vague and does not describe what
the company does. Moreover, it is unclear what market
segment the company operates in, there is no apparent
USP for the company, and it does not state how this
purpose will be delivered.

When it is well articulated, a purpose can be a powerful
statement of intent that drives a company. We encourage
companies to consider the above factors when
developing their purpose statements.

Connection between purpose, values, and strategy
A strong connection between purpose, company values
and strategy goes a long way to ensuring its effectiveness.

In many annual reports, the three concepts were largely
presented separately, with linkages either absent or
unclear. 22% stated one form of connection between

their purpose, values, and strategy, such as encouraging
employees to act in line with all three. 16% of companies
described connections with either two or all three of
purpose, values, and strategy by clearly demonstrating
how each one informed the other.
In addition to the guidance provided by this report,
we recommend that companies consult the following
publications:

GUIDANCE
ON BOARD
EFFECTIVENESS
JULY 2018

Financial Reporting Council

The Guidance on
Board Effectiveness

Financial Reporting Council

FRC expects companies to demonstrate further
improvements in the quality of disclosures of how
purpose, values, and strategy are connected.

https://www.frc.org.uk/getattachment/53799a2d-824e-4e15-9325-33eb6a30f063/Annual-Review-of-the-UK-Corporate-Governance-Code,-Jan-2020_Final

https://www.frc.org.uk/getattachment/53799a2d-824e-4e15-9325-33eb6a30f063/Annual-Review-of-the-UK-Corporate-Governance-Code,-Jan-2020_Final

https://www.frc.org.uk/getattachment/43c07348-e175-45c4-a6e0-49f7ecabdf36/Business-Models-Lab-Implementation-Study-2018

https://www.frc.org.uk/getattachment/43c07348-e175-45c4-a6e0-49f7ecabdf36/Business-Models-Lab-Implementation-Study-2018

https://www.frc.org.uk/getattachment/43c07348-e175-45c4-a6e0-49f7ecabdf36/Business-Models-Lab-Implementation-Study-2018

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

8Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Social/stakeholder dimensions

Principle A of the Code recognises the
importance of “generating value for
shareholders and contributing to wider society.”

Of that 93%, however, 45% of purpose statements either
did not describe any social or stakeholder dimensions or
indirectly referenced them. 23% of companies mentioned
either a social or stakeholder dimension in their purpose,
such as serving their customers, while 32% clearly
described social and/or stakeholder dimensions to their
purpose.

Described a purpose that did not mention either
company profits or shareholder value

Did not describe a purpose statement

0 10 20 30 40 50 60 70 80 90 100

93 7

Board oversight
Company purpose should act as a driver for decisions
and actions. It is therefore critical that the board agrees
the purpose and oversees the alignment between values.

76%

24%

We found the following:

Do not clearly describe how the board
satisfied themselves with the alignment
of their purpose with their business
practices
Companies exercise oversight over their
purpose implementation in a variety
of different ways, such as receiving
reports at board meetings, monitoring
engagement channels, and periodically
assessing the application of purpose
statements using KPIs

Last year, we noted that many companies had articulated
their purposes through the prism of profits or shareholder
value. This year, we expected this to change, especially
as many companies committed to reviewing their
purposes during 2019.

Many boards appear not to be exercising their oversight
function to ensure that company purpose works as a
driver for the company. Oversight can be exercised by
boards in many ways, such as requesting regular reports
from executives on key areas, purpose implementation
updates, and meeting company employees to hear
their views directly about how the company’s purpose
works in practice. By reporting such matters, boards are
evidencing the quality of their oversight.

COMPANY CULTURE

Like purpose, company culture should be led
from the top and aligned with purpose, values and
strategy as noted in Principle B of the Code.

It was good to see this year that almost all companies
within our sample discussed their company culture, often
in the letter from the chair. The degree to which culture
appears to be embedded in each company varies.

These changes acknowledge that companies have
different stakeholders, and we encourage this to be
reflected in company purpose statements.

KEY MESSAGE

Company culture supports the success of the
strategy, and if a board embeds a culture that is
supported by the employees, then companies
should have a motivated and high performing
workforce which delivers the outcomes necessary
for long term success.

We found that 52% commented on their culture in a
meaningful way and 75% also commented on their values
and linked this to culture. Our findings are in line with the
Grant Thornton assessment of the FTSE350 where they
found that 83% of companies articulated their values.
Many companies have reported that culture, incorporating
values and behaviours, continues to be a work in progress
or that a significant review has been completed during
2019 and therefore, culture is taking time to bed in.
Companies have reported that they have undertaken a
number of events to promote and embed the desired
culture. These included culture road shows and working

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9Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

through employee groups to discuss culture and its
relationship with values. Some companies set up culture
committees and others noted that culture was now a
standing item on board agendas.

The better disclosures explained how the senior
leadership teams had sought insight from all stakeholders
(internal and external) when reviewing their culture and
linking it to values and strategy. This, in particular, helped
the articulation of the values when aligning to both
purpose and behaviours.

Many companies linked culture and values to other
issues – for example, improving training and health and
safety, achieving improved diversity within the company
or consideration of principal risks. We observed that
many companies set up advocacy groups, for example
for ethnic minorities, LGBTQ+ colleagues or women
returners. Others discussed the importance of wellbeing
and mental health issues.

Better reporting was observed when companies made
a clear link between the actions to improve culture with
associated KPIs.

Better reporters explained the link between supporting
the health and wellbeing of the workforce and investing in
training to achieve high performing culture.

A number of companies reported that by supporting
diversity and inclusion they were able to achieve a high
achieving culture and improve the talent pipeline.

Monitoring and assessing culture
Although reporting on culture has improved compared
to early adoption reporting last year, there is still more
work to do on monitoring and assessing company
culture. Within our sample – 65%, reported or alluded to
the use of an employee survey (either in isolation or in
combination with other indicators) as a way of monitoring
culture. Surprisingly, 20% did not report any such
monitoring.
Staff surveys can offer insight into culture but have
significant limitations, especially when considered in
isolation.

When reporting on people surveys, companies tended
to cite high engagement scores and scores related to
whether the company was a ‘great place to work’ or
would be ‘recommended’ to others. Few companies
reported looking beyond the headline figures to try and
better understand any negative comments or poorer
scores.

The better reports acknowledged where more could be
done to follow up on surveys and introduced specific
culture surveys, set up working groups to address
any concerns and in one or two cases explained that
additional training had been offered. In some cases,
sessions were set up to discuss culture and values with
senior managers.

Site visits
We also have concerns about the reliance on site visits to
gauge culture. Such visits can be helpful for directors and
non-executive directors (NEDs) to improve understanding
of the business and its operations. However, whether
an escorted visit to a ‘site’ offers valuable insight into
company culture is questionable.

EXAMPLE

A good example of the use of a site visit was for the
workforce engagement NED to visit a specific site
and meet a section of the workforce without the
manager in attendance. The example went on to
explain that there was a discussion and Q&A session
on company strategy and values.

In isolation
they only offer
insight at one
point in time

It
can be

difficult to fully
understand what
matters underpin

the responses

Management
do not appear

to always set out
plans to deal with
concerns raised

Follow-up via
pulse surveys is
often necessary

More
information can
be gleaned from
targeted surveys

e.g., culture
survey

There is
often pressure
on employees
to complete

surveys.

People surveys
We have the following concerns in relation to people
surveys:

10Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

“It is important that members of the board and
the executive team meet with a cross section of
employees when on a visit – not just those in senior
positions – and discuss specific issues.”

Do

• Set aside specific time to meet with a smaller team
or division.

• Arrange for board members and senior managers
to speak with employees both with and without
line managers in attendance

• Have a purpose or theme for most of the discussion
e.g., values, strategy

• Allow for general Q&A at the end
• Offer to follow up issues, and feedback

We suggest that for site visits to be effective, they should
have a purpose beyond familiarisation.

Considerations for an effective site visit:

• Just hold a meeting and leave
• Have a guided tour only
• Put employees on the spot with direct questions

they may not be prepared for

Don’t

KEY MESSAGE

Our analysis aligns with the sentiment referenced
in our previous report released earlier this year
which highlighted that there is limited disclosure
of how the information gleaned from such visits
was fed into wider board discussion and whether it
had informed future strategy, culture, risk or other
matters.

It was not always clear what metrics
were used in all cases, but a useful list
is contained in the Guidance on Board
Effectiveness.

GUIDANCE
ON BOARD
EFFECTIVENESS
JULY 2018

Financial Reporting Council

Other approaches to monitoring and assessing culture
included a number of metrics, often referred to as a
‘culture dashboard’ which the board considers on a
regular basis.

Turnover and absenteeism rates
Training data
Recruitment, reward and promotion decisions
Use of non-disclosure agreements
Whistleblowing, grievance and ‘speak-up’ data
Board interaction with senior management and
workforce
Health and safety data, including near misses
Promptness of payments to suppliers
Attitudes to regulators, internal audit and
employees
Exit interviews
Information from internal audit on the impact of
policies and processes

Other approaches used culture pillars, which linked to
strategy and values and were assessed by the board
at regular intervals. As already mentioned, a number of
companies have a culture committee which includes the
consideration of monitoring and assessment of culture.

“Internal audit can also be used to consider the
effectiveness of policies and processes introduced
to improve culture.”

“In 2021 we will be revisiting our Culture report
of 2016, to support further improvements in
embedding and monitoring culture.”

Examples of metrics to monitor and assess
culture:

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

11Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

FRC expects more companies to take a more
rigorous approach to culture and set up effective
ways of monitoring and assessing both the
culture and its alignment with purpose, values and
strategy, including setting out any actions taken in
this area in line with Provision 2.

EXAMPLE

One company reported that they were aware of silo
working within the company and explained how they
had taken action to deal with this.
Other examples included setting out broad issues that
had been highlighted through the whistleblowing hot
line and then explained, giving statistics, how these
issues had been resolved.

Although both of the above examples highlight less
positive aspects of company culture, explaining how
this has been dealt with demonstrated a commitment to
improve the situation.

Very few companies discussed company behaviours,
but most companies commented on the importance of
aligning values and behaviours. Many companies had
codes of conduct which were seen either as a tool to
offer support to employees or as a rule book.

TENURE, SUCCESSION PLANNING AND BOARD
EVALUATION
Independence
Our analysis considered compliance with Provision 9 of
the Code which recommends that the chair should be
independent on appointment and that the roles of the
chair and the chief executive should not be exercised
by the same individual. We found that this Provision had
the highest figure of disclosed non-compliance, with
16 companies reporting non-compliance. 12 of these
disclosed that the chair had not been independent on
appointment, three stated that the roles of the chair and
the CEO were combined and in one company neither of
these Provisions applied.

KEY MESSAGE

A clear and meaningful statement explaining why
the chair is not independent should be provided,
stating the rationale, and reason for this, along
with how this benefits the interests of the
company and its stakeholders.

Companies are reminded that the chair should be
independent on appointment when assessed against the
circumstances set out in Provision 10.

Where such circumstances are proposed by the board,
companies must consult major shareholders ahead of
the appointment. Reasons for the approach should be
shared with all shareholders at the time of appointment
and published on the company website.
Companies should value the input independent NEDs can
provide on constructive challenge, strategic guidance,
specialist advice and holding management to account.
We were pleased to see that (with the exception of three
companies where non-compliance was temporary) only
one company reported continuous non-compliance with
this Provision.

Provision 11 advises that: “At least half of the board,
excluding the chair, should be Non-Executive
Directors whom the board considers to be
independent.”

Boards are reminded that they should identify in
their annual reports each NED they consider to be
independent, by evaluating their independence based on
the criteria given in Provision 10. Some of the companies
we reviewed have identified directors who, despite
being subject to one of the criteria of Provision 10, are
still considered to be independent. The explanations
provided were mostly vague and not clear enough to
justify the independence of the NED in question.

FRC expects companies to provide clear explanations
of how they have determined a NED to be independent
if they fall under one of the criteria in Provision 10.

Financial Reporting Council

12Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Provision 19 advises that: “Chair should not
remain in post beyond nine years from the date of
their first appointment to the board.”

Chair tenure

Our analysis found nine companies where the chair
remained in post beyond this period. On the whole, the
explanations provided for this were poor. In some cases,
companies provide no explanations at all; others stated
that the tenure was extended while a replacement was
found which in turn questions the effectiveness of their
succession planning.

The better explanations provided a clear rationale for
extended tenure – for example, to complete a significant
transaction or steer the board through a difficult period.
Such matters are clearly crucial to the long-term success
of the company and in some cases are better completed
by one individual if possible. These explanations often
provided a timeline for the extension, which offers further
clarity to the reader.

We examined and analysed the compliance of the chair’s
tenure in our sample of 100 companies.

Provision 19

9 companies within our sampleDISCLOSED NON-COMPLIANCEwith Provision 19
companies that noted

that the chair was
set to be replaced 2

in 2020 in 2021

2 9 highlighted that the chair retired or wasreplaced before the end of yearout of

3

company noted that
the Chair will continue
to stay in his position

1 1 companyis unclear
KEY MESSAGE

Unless there is a strong case for an individual to
stay in their role beyond nine years there is a risk
of becoming too reliant on the views and skills of
one individual. Boards are more effective when
they have a broad mix of skills, knowledge and
experience and regularly refreshed.

Companies should discuss tenure at the time of
appointment to help to inform and manage the long-term
succession strategy. We accept that there will always be
times when the unexpected happens and an individual
leaves unexpectedly. In such cases a detailed explanation
should be provided in the report.

Financial Reporting Council

As a result of the COVID-19 pandemic, we expect a
number of companies will ask their chairs and NEDs to
remain in post beyond the nine-year rule, but we would
expect to see the reasons for continuing on the board
explained in much more detail.

Equally, we will be interested to see how those individuals
with more than one directorship discharged their duties
during the pandemic, particularly given that many
companies introduced more frequent meetings of boards
and committees.

During a time of significant stress on companies, it is
vitally important that all board/committee members have
sufficient time to read through and consider matters
under discussion, in order to play a continuous and
effective role in leading the company.

FRC expects all companies to pay closer attention
to the issue of overboarding by their directors and
the size and membership of committees.

13Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

“We found little improvement from our review
published earlier this year.”

Succession planning
The nomination committee is responsible for board
recruitment and it should conduct a continuous and
proactive process of planning and assessment. It must
take into account the company’s strategic priorities
and the main trends and factors affecting the long-term
success and future viability of the company.

The reports we reviewed provided minimal insight into
company succession planning; many continued to
focus on the appointment process rather than providing
information on how companies plan for succession. Only
one outlined their considerations and outcomes related
to their succession arrangements for NED, executive and
senior management roles, whilst others simply noted the
use of an external recruitment agency.

Succession plans should be in writing to help ensure
adherence to them, particularly when a company states
that it wishes to improve diversity. We hoped to see
clear links between diversity targets, succession plans
and board evaluation, but this was not the case. There
was little discussion of the need to expand talent pools
to achieve diversity targets or the use of recruitment
companies to provide diverse long and shortlists.

Under Principle J of the Code: “Appointments to
the board should be subject to a formal, rigorous,
and transparent procedure, and an effective
succession plan should be maintained for board
and senior management.”1

Further consideration should also be given to how the
planning arrangements are operated across contingency,
medium-term, and long-term planning.

Financial Reporting Council

What to consider when reporting on your
succession arrangements:

Include a summary of short, medium and
emergency succession plans within your report
Ensure that your succession plans are proactive
and not just purely reactive
Ensure that your disclosure offers a structured
way of identifying the board’s composition needs
(i.e. a skills matrix)
Consider how succession plans link to other
policies and targets such as diversity targets
Ensure that you disclose how frequently
succession plans are reviewed, the scope of
these plans, how internal talent is managed
and whether external search consultants are
engaged

FRC expects to see an improvement in reporting
on succession planning. This is particularly the
case for companies which highlight succession
planning as an outcome of a board evaluation as
an area to improve.
We would also like to see improved cohesion
between diversity commitments, board evaluations
and succession plans.

1 Refers to the executive committee or the first layer of
management below board level.

Reporting suggests that succession arrangements
are reactive as opposed to continuous and ongoing.
This is particularly disappointing given that many of the
companies within the sample stated that succession
planning was a major focus for the nominations
committee in the reporting period and an area to improve
upon following an outcome of its evaluation.

14Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Board evaluation
Our analysis suggests that transparency surrounding the
evaluation process has improved. There remain concerns
in relation to companies providing sufficient details about
the outcomes from the evaluation process, particularly
when it is facilitated internally.

Internal evaluations can build on the recommendations of
external evaluations and should also address any other
matters of board dynamics. They should be undertaken
in a rigorous manner, ensuring anonymity of views of
board members. Internal evaluations should not be seen
as a check-in between the external evaluation every three
years.

External facilitation adds value by introducing an
independent perspective, new ways of thinking, and
a critical eye to board composition, dynamics and
effectiveness. The nature and extent of the external
evaluator’s contact with the board and individual directors
can be a defining factor of the quality of the evaluation.
An explanation as to why the chosen approach or
method selected (e.g., surveys, document reviews
and one-to-one interviews) was considered the best at
measuring the effectiveness of the board is considered
good practice. We remind companies that the Guidance
on Board Effectiveness states that questionnaire-based
external evaluations are unlikely to get underneath
the dynamics in the boardroom and a more rigorous
approach should be considered.

KEY MESSAGE

Reporting on board evaluations should not be
approached as a compliance exercise. Instead,
a clear set of recommendations, actions, and a
time period for review of progress against agreed
outcomes should be made.

Approaches to reporting on board evaluation
When explaining the process of evaluations, companies
often used diagrams and flow charts showing
the timeline; when interviews took place; when
questionnaires were issued; and, what those involved.
This offers some insight in relation to Provision 23 but
fails to deal with those elements of the Provision relating
to “the outputs and actions taken, and how it has or will
influence board composition”.
Many companies simply state that: “the board is working
effectively together”, and fail to provide any additional
information.
We understand that certain details of outcomes can
be considered too sensitive to disclose in the annual
report, but we would note that it is encouraged under the
Guidance on Board Effectiveness that the chair should
provide a summary of the outcomes and actions of the
board evaluation process in their statement in the annual
report.
The reluctance to provide detail on the outcomes is
also reflected when commenting on recommendations
from previous evaluations. Whilst a few companies have
provided information in this area, the level of detail was
limited and tended to indicate broad future areas of focus
with little explanation of changes made during the year
following the evaluation.

EXAMPLE

An example of this would be a disclosure along the
following lines: “following the previous evaluation,
an increased focus has been placed on board
composition, particularly diversity”.

Reporting in these terms is ambiguous and does not
provide the reader with any substantial information on
what action is required as a result of the evaluation. In such
circumstances, companies should take note of Provision
23 of the Code and consider whether its succession plans
should be revised to achieve any amendments to board
composition.

Enhanced reporting may include a statement explaining
whether actions have been agreed jointly by both the
evaluator and the board.

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

15Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Provision 23 of the Code states that the Nomination
Committee should describe “the policy on diversity
and inclusion, its objectives and linkage to company
strategy, how it has been implemented and progress
on achieving the objectives.”

Board dynamics

EXAMPLE

Companies regularly reported that the evaluation found
that independent NEDs “offered an effective challenge
in the boardroom” – statements such as this were
seldom supported with any additional insight. Reporting
would be improved by explaining whether the challenge
was observed, if it led to more creative thinking or the
introduction of new ideas or approaches.

We observed that reporting on evaluations tended to
focus on board activities rather than dynamics (where
reporting was vague, if provided at all). Principle L of the
Code does not focus on what the board does but on its
composition.

Financial Reporting Council

FRC expects companies to consider reporting
on how the board works together as a unit, the
tone set by the chair, and the chief executive, the
relationships between board members particularly
chair/chief executive, chair/senior independent
director, and executive/non-executive directors.

DIVERSITY

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

74

Type of diversity policy taken in our sample of 100
companies

57

No. of companies
with a diversity

policy

26

9% have both

No. of companies
with no described

policy

No. of companies
with a board or
workforce policy

Diversity policies
Our review last year noted that almost all companies had
a diversity and inclusion policy. This year, we aimed to
establish exactly how many companies described their
diversity policies in their annual reports, if a link to the
policy on their website was provided, and to identify who
the diversity policies apply to. The graph below shows the
percentages of companies with diversity policies, what
type of policies they have, and how they signpost them.

Some companies cited their diversity policies in their
annual reports without describing them or providing a link.
Companies should either describe their diversity policies in
full in their annual report or summarise them and link to the
full document on their website to enable easy access.
Other regulators support this stance – the FCA have
themselves encouraged companies that have not yet
adopted a diversity policy to consider doing so in their recent
report on corporate governance disclosures. Companies
should have both a board and a workforce diversity policy,
and we expect those companies that have not published
their policies or easily signposted them to do so next year.
Diversity targets
The Code states that companies should
describe their diversity objectives. Our
previous review noted that given the
publication in 2018 of the FRC’s review of
Board Diversity Reporting, we expected
more companies to disclose their targets,
and we have looked more closely at
annual reports this year to see if there has
been an improvement.
We found that a majority of companies, 63%, disclosed
diversity targets in their annual reports. However, not many
companies had board targets other than gender (many
of which were solely in line with the Hampton-Alexander
Review), while those that had ethnicity targets were primarily
focused on the Parker Review. 26% of companies had
targets for both the board and senior management.
Generally, senior management diversity targets received
far less attention than their board counterparts. Few
companies had ambitious diversity targets across multiple
under represented groups for both the board and senior
management.

Financial Reporting Council

BOARD
DIVERSITY
REPORTING
SEPTEMBER 2018

https://www.fca.org.uk/publication/primary-market/pmb-31-corporate-governance-disclosures-listed-issuers

https://www.frc.org.uk/getattachment/62202e7d-064c-4026-bd19-f9ac9591fe19/Board-Diversity-Reporting-September-2018

https://www.frc.org.uk/getattachment/62202e7d-064c-4026-bd19-f9ac9591fe19/Board-Diversity-Reporting-September-2018

16Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

“A significant number of companies do not have
any diversity targets for either the board or senior
management, while a slightly lower number of
companies have targets for both.”

40%

30%

20%

10%

0%

29

Meeting diversity targets taken in our sample of
100 companies

32

Met or exceeded
targets

39

Failed to meet
targets

Partially met
targets

However, it was disappointing to see that 37% of
companies did not appear to have any voluntary diversity
targets. In addition, while some companies attempted
to demonstrate the effectiveness of their approach
by having a female board representative above the
Hampton-Alexander target, others did not appear to have
any evidence to justify their decisions to not have any
diversity targets. Those which attempted to justify this
approach said that it was a deliberate decision due to
their policy of recruiting “on merit”.

Financial Reporting Council

FRC expects to see all companies promoting
and recruiting on merit. Those who use it as a
justification for not actively pursuing diversity policies
should demonstrate how their approach brings
about diversity in the boardroom and workforce.

Diversity representation
Diversity statistics are an important way of monitoring
the effectiveness of diversity policies as well as progress
against diversity targets. Given the importance of the
Hampton-Alexander and Parker reviews, the level of
disclosure about diversity statistics is key.

0 10 20 30 40 50 60 70 80 90 100

66 22 12

Only legally required gender statistics
One additional diversity statistic
Statistics across multiple groups

After gender, the second and third most commonly
disclosed diversity groups were ethnicity and age
respectively, with a handful of companies disclosing other
characteristics such as sexual orientation.
We also examined the diversity of company talent
pipelines in general. The vast majority of companies,
(96%), disclosed information about their female pipeline,
but far fewer companies disclosed their ethnicity
pipeline, and many companies only disclosed their senior
management figures.

“Positioning organisations as meritocracies implies
that organisations operate in environments of
social equality. Meritocracy may well be a value
and a goal, but it is not a current reality. The
practice of committing to greater diversity whilst
reassuring stakeholders that the firm appoints on
merit is unhelpful as it perpetuates a number of
myths”, including that “meritocracy and diversity
are values that are ‘at odds’ with one another and
cannot both be achieved simultaneously.”
Delta Alpha Psi

Delta Alpha Psi (DAP), advisors to the Parker Review,
while exploring reasons behind companies opting not
to have voluntary diversity targets, state that reporting
would be much more aligned to organisations’ values if
there was a better understanding of the value of diversity
and the myths regarding the nature of meritocracy.

DAP recommends that organisations should recognise
their shortcomings with respect to diversifying their
boards, leadership teams, and workforces, and report
on actions taken, commitments, and proposed solutions
without the caveat of meritocracy.

The FRC is concerned that in too many cases, those
shortlisted for the interview are not drawn from a
sufficiently wide talent pool. To increase diversity and
deliver effective meritocratic appointments, companies
must consider candidates from sufficiently diverse
backgrounds.

Of those companies that did set targets, the results of
target outcomes were mixed.

17Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Only 20 companies in our sample explicitly mention the
Parker Review as one of their targets. This is concerning
as the Parker Review recommends FTSE100 boards
to have at least one director from an ethnic minority
background by 2021.
As this target was just over a year away at the time that
these annual reports were published, we expected to see
all FTSE100 companies in our sample reporting on their
progress towards this target.

0 10 20 30 40 50 60 70 80 90 100

3 23 71

Have a female chair

Have a female CEO

Have a female senior independent NED

Do not have a female director occupying any of
those three positions

5

Some companies have facilitated the establishment
of support networks e.g., women returning from
maternity leave, military veterans, and LGBTQ+
individuals. However, in most cases, it was not clear
how this support translated into career development and
promotion.
The FRC has also commissioned work by The Good
Side to examine the barriers and challenges LQBTQ+
people face in progressing to senior leadership positions;
how senior leaders have overcome those obstacles; and
any good practices or procedures that enable LQBTQ+
progression.
This research complements the FRC’s own research into
diversity reporting considered in this report. Both found
that very few companies have published their data on
LGBTQ+ representation and we encourage companies
to report regularly and transparently on all of their diversity
data, targets, and progress.
The key findings and recommendations, which can be
applied to many minority groups, can be found here.

KEY MESSAGE

Diversity both in the boardroom and the talent
pipeline can improve the decision-making
process in companies through offering rigorous
debate and different perspectives than the
company has previously had.

“Based on our research, it appears that for
many companies, diversity extends to gender
representation only, and is predominantly driven
by external targets.”

The FRC recently commissioned London Business
School and SQW to examine the evidence for links
between diversity in FTSE350 board membership,
boardroom dynamics and company performance. This
research will be completed in 2021.

KEY MESSAGE

Perhaps most importantly, companies should
show visible evidence that they ‘walk the talk’
on inclusion through collecting, tracking and
transparently reporting on employee data and
company progress over time.

In summary, companies are urged to:

Embed inclusive practices
Develop policies which protect everyone from
discrimination
Capture individual insight and experiences and
act on these when necessary
Offer training
Have senior sponsors or mentors policy
Build partnerships with other stakeholders

We encourage companies to publicise their diversity
policies and practices more clearly, set appropriate
targets across multiple areas of diversity, describe their
progress against those targets in more detail, and include
both senior management alongside boards when setting
these targets to create a more diverse talent pipeline.

https://www.frc.org.uk/getattachment/19f3b216-bd45-4d46-af2f-f191f5bf4a07/The-Good-Side-x-Financial-Reporting-Council-Building-more-open-business-2011

18Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

REMUNERATION
Key interim findings of the Portsmouth University
research include:
• The Code has increased the extent of the

disclosure against Provisions and Principles
related to remuneration policies

• Remuneration committees appear to meet the
required objectives of the new Code

KPIs
In our previous review, we noted an increase in the use
of non-financial KPIs both for remuneration and more
widely. Our research confirmed that this is still the case,
as shown below:

Disclosed non-
financial KPIs

Either did not
disclose any non-
financial KPIs at all
or listed statistics
without context

71

29

Principle P of the Code states that: “Remuneration
policies and practices should be designed
to support strategy and promote long-term
sustainable success. Executive remuneration
should be aligned to company purpose and values,
and be clearly linked to the successful delivery of
the company’s long-term strategy”.

Disclosed non-financial KPIs, but did not explain how
they were designed, why they chose them, or their link
to strategy

Explained one of either design, choice, or strategy
relating to their non-financial KPIs

Explained two of design, choice, and strategy relating to
their non-financial KPIs

Explained all three of design, choice, and strategy
relating to their non-financial KPIs

25

17

12 17

We were pleased that well over half of companies directly
link non-financial KPIs to their remuneration measures. It
was also encouraging to find that many companies in our
FTSE350 sample, and to a lesser extent the SmallCap,
had identified environmental areas as non-financial KPIs.

We found that overall, the remuneration picture is
mixed, with improvements in reporting on workforce
pay, discretion, and Provision 40, but disappointing in
relation to KPIs, pension contributions, and workforce
engagement.

Alongside our own review, the FRC has commissioned
a research project in partnership with Portsmouth
University (to be published in early 2021) to examine
the remuneration policies of FTSE350 companies which
updated their policies in 2020. The purpose of the
research is both to determine the impact of the Code on
remuneration policies and to assess shareholder dissent to
those policies through votes at AGMs.

The Portsmouth University’s interim research offers a
quantitative assessment of the extent of disclosure of
remuneration policies in FTSE350 annual reports. Our
review, on the other hand, assesses the effectiveness
of company remuneration reporting in respect of the
Code. We will refer to the interim findings of Portsmouth’s
research throughout this section of the report.

Explanation of non-financial KPIs

Chart refers to the 71% of
companies that disclosed
non-financial KPIs.

Disclosure of non-financial KPIs

19Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

KEY MESSAGE

In line with the responsibility of the board for
narrative reporting, companies should be
providing a valid explanation of the relevance
of each non-financial KPI in the context of the
resilience of their business model to related risks.

43% of companies used specific non-financial KPIs
in either their annual bonuses, long-term incentive
plans (LTIPs), or both, with varying percentages and
reassuringly weightings, while 30% specified only vague
personal or strategic objectives. 27% did not link any
non-financial KPIs to their remuneration at all.
A number of companies in our FTSE350 sample also
identified meeting their commitments on climate change
as a standalone non-financial KPI and provided a clear
explanation of how they measure the KPI and why
they intend to use specific environmental factors as
measurements of their performance.

Provision 33 of the Code states that the RemCo
has the responsibility for the remuneration policy
for executive directors, reviewing workforce
remuneration, and aligning incentives and
rewards with company culture.

While it is positive to see that many companies have
included non-financial KPIs in their remuneration
measures, we would encourage those companies
that have not done so to consider their inclusion.
For those companies that did not specify personal/
strategic objectives, we would encourage them to detail
the specific objectives they are measuring against.
Reassuringly, Portsmouth University’s interim findings
indicate an improvement in the clarity and use of non-
financial KPIs in annual reports for remuneration.

It is important to understand the methodology behind
KPIs as their role is crucial in ensuring transparency for
investors in measuring the performance of companies.
The selection of metrics matters because they help
to paint an accurate picture for shareholders to make
investment decisions. Using misleading or ‘cherry-picked’
KPIs without providing any supporting information,
(such as disclosing customer satisfaction scores without
explaining their background and context), can have the
opposite effect.

The most important aspect for KPIs is that they should
be clearly linked to the company’s strategy and are
reflective of how a company is fulfilling its targets, goals,
and purpose. We encourage companies to consider
these three elements when including KPIs in future
annual reports.

Workforce pay
While the Code focuses predominantly on remuneration
for executive directors, it also emphasises the importance
of boards both understanding and taking account
of workforce pay and policies when considering
company culture and remuneration. Consequently, our
research looked at the degree to which companies had
commented on workforce pay.

83% of companies reported on workforce pay, covering
a pay comparison between the CEO and a group of
employees as well as CEO pay ratio disclosures. This is
primarily due to recent changes in the law which require
companies to compare the salary, benefits, and bonus
elements of the CEO with a comparator employee group.

“Some companies had gone beyond the
government’s guidelines to report on remuneration
linked to the achievement of sustainability and
climate change targets as key part of their
governance.”

Portsmouth University also found that reporting related to
Provision 33 significantly increased this year compared to
those annual reports published in 2017.

https://www.legislation.gov.uk/ukdsi/2018/9780111170298

https://www.legislation.gov.uk/ukdsi/2019/9780111185940

20Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

Discretion

Examples of how discretion was exercised
include:

• Lowering bonus outturns
• Not paying bonuses
• Deferring bonuses into shares
• Lowering LTIP payouts
• Lapsing LTIP awards entirely
• Reducing maximum future opportunity for

LTIPs
• Increasing LTIP awards
• Cancelling scheduled pay rises for senior

executives

FRC expects remuneration policies to elaborate
on their RemCo discretionary powers. If existing
remuneration policies do not currently include
those controls, they should be strengthened.

Did not state anything about aligning their pension
contributions with the workforce
Would align their pension contributions on a specific date
or omitted information about ether their exec./workforce
levels.
Had aligned all their exec director pension contributions
with the workforce

Pension contributions
Executive pension contributions which are not in line with
those received by the rest of the workforce have become
increasingly contentious, with many companies facing
shareholder dissent. We continue to see companies
unifying their pension contributions levels, particularly
those that have reviewed their remuneration policies this
year.

Unfortunately, our research discovered that a majority of
companies have not yet aligned the pension contributions
of all their executive directors with their workforce.

0 10 20 30 40 50 60 70 80 90 100

20 47 32

Section 5 of the Code describes the role
of the remuneration committee in setting,
overseeing, and applying discretion to executive
remuneration.

It is concerning that some declined to disclose the
workforce pension contribution rate. We also found that 43
companies claimed full compliance with the Code which
includes Provision 38 (pension contribution alignment) in
their corporate governance statements but did not in fact
demonstrate compliance with this Provision.
While 32% of companies had aligned all their executive
director pension contributions with the workforce, this is
far less than we were expecting.

Our research found that a clear majority of companies
provided a full explanation of their Remuneration
Committee (RemCo) discretionary powers, specifically
around malus/clawback, bonuses, and LTIPs. In many
cases, companies explained when they had exercised
such discretion and why. Circumstances outlined where
discretion was exercised included company performance
and share price.

Portsmouth University’s interim research also found that
the number of companies with remuneration policies
enabling the use of discretion to override formulaic
outcomes, both upwards and downwards, increased by
20%, compared to remuneration policies in 2017.

A minority of companies provided only partial
explanations of their RemCo’s discretionary powers,
leaving out bonuses or LTIPs, while a small number did
not provide sufficient information about either. Given their
importance to stakeholders such as investors, customers
and suppliers, companies should be describing what
discretionary powers they have over all pay elements.

Financial Reporting Council

FRC expects all companies to move to the full
alignment of pension contributions as soon as
possible. We also expect, along with investors,
those companies which still have not addressed this
issue to provide a clear and specific rationale and to
define a timeline by when this will be rectified.
Until then, those companies must disclose this
non-compliance in the governance statement.

21Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Addressed the six elements of Provision 40 in an
effective manner or addressed them in a moderate
amount of detail. In terms of offering transparency, many
of these companies clearly explained how they had
addressed each element of the Provision, which is in line
with Provision 41

Partially addressed some elements of Provision
40, choosing to focus on areas such as clarity and
simplicity, but neglecting to disclose how the other
elements had been considered

Paid lip service to the Provision by repeating the wording
from the Code within their report, but did not describe
what they did to fulfil it

9

42 49

Provision 40

Portsmouth University’s interim research found that the
extent of disclosure in annual reports regarding each
element of Provision 40 improved significantly.

Unfortunately, 42% of companies failed to address all
the elements of Provision 40. Many companies revised
their remuneration policies this year in line with the
remuneration policy cycle, and we would have expected
these companies to, at the very least, acknowledge the
existence of the Provision in their updated policies and
explain how they propose to report on these matters in
the future.

FRC expects to see clear descriptions of how each
element of the Provision has been accounted for when
determining the remuneration policy for the next reporting
cycle.

Provision 40 of the Code states that: “When
determining executive director remuneration
policy and practices, the Remuneration
Committee should address the following”:
• Clarity
• Simplicity
• Risk
• Predictability
• Proportionality
• Alignment to culture

Reporting against Provision 40

22Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council22 Financial Reporting Council

Stakeholder engagement issues were expanded within
the Code in line with the emphasis placed on s.172
reporting. We acknowledge that companies have been
engaging with a wide range of stakeholders and have
some good practices in place. Companies should be
using these engagements to gain greater insight into
the views of their stakeholders and to assess how these
views and ideas can help inform strategy. Meeting the
new and evolving needs of key stakeholders is essential
for a company’s sustainable success.

C. STAKEHOLDER ENGAGEMENT

• Identify key stakeholders and explain how stakeholders affect the development and
implementation of strategy

• Identify key concerns for each stakeholder group. This should ideally be informed by
stakeholder feedback and reflect your stakeholders’ evolving needs

• Explain how particular engagements enabled the company to better understand the
needs and views of stakeholders

• Explain how stakeholder feedback helped inform decisions
• Address future implications and planned actions arising from feedback received and

impacts of decisions

• Report on the outcomes of engagements and why key decisions were taken in light of
that engagement

• Do not equate outcomes with processes
• Reporting on one-sided engagements driven by the company pays lip service to the

Code and does not amount to meaningful engagement

IDENTIFYING
STAKEHOLDERS

AND ISSUES

ENGAGING WITH
STAKEHOLDERS

UNDERSTANDING
STAKEHOLDER VIEWS

Provision 5 of the Code states that: “The board
should understand the views of the company’s
other key stakeholders and describe in the annual
report how their interests and the matters set out
in section 172 of the Companies Act 2006 have
been considered in board discussions and
decision-making.”

Principle D of the Code states that the board
should ensure effective engagement with, and
encourage participation from, its stakeholders.

KEY MESSAGE

Companies are failing to provide sufficient
information for investors and broader stakeholders
in their s.172 statements. This is in line with Grant
Thornton’s recent finding that just 38% of FTSE350
companies provided detailed disclosure.

BOARD ENGAGEMENT WITH STAKEHOLDERS AND STEPS
TAKEN TO UNDERSTAND STAKEHOLDER VIEWS
We encourage companies to provide detailed s.172
statements with examples of key decisions relating to
each stakeholder group. Cross-references should be used
to direct the reader to more information, and companies
should not simply provide a list of cross-references to
various parts of the strategic report.

Our monitoring looked not only at s.172 statements but
also at how the s.172 factors have been applied across the
strategic report.

https://www2.grantthornton.co.uk/corporate-governance-review-2020.html?_ga=2.219568793.1858315815.1605520465-221054369.1602605107

https://www2.grantthornton.co.uk/corporate-governance-review-2020.html?_ga=2.219568793.1858315815.1605520465-221054369.1602605107

23Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

ENGAGING WITH
STAKEHOLDERS

IDENTIFYING
STAKEHOLDERS

AND ISSUES

FRC expects companies to both report on
how the company has engaged with its key
stakeholders and on the steps it has taken to
understand the views of their stakeholders, in line
with Provision 5 of the Code.

KEY MESSAGE

Whilst many companies identified the issues
pertaining to each stakeholder group, in the
majority of cases, companies listed the relevant
issues but did not provide specific examples of
engagement on each of these issues.

“Although the vast majority of companies reported
on some form of engagement with stakeholders,
many are still failing to report on the outcomes of
these engagements.”

Contextualising stakeholder engagement within business
strategy was often achieved by appropriate signposting
to the relevant part of the Annual Report, for example to
information on relevant KPIs, case studies and risks for
each stakeholder group.

A number of companies also linked each stakeholder
group to the specific company values that the company is
guided by when interacting with each stakeholder group.
When accompanied by relevant outcomes of stakeholder
engagements throughout the year (e.g., the initiation
of public health awareness campaigns or entered into
partnerships to develop training in a particular field),
‘operationalising’ the company’s values in this way is
an effective method of demonstrating the integration
of company values throughout the business and its
decision-making processes.
Boards should be asking, and reporting on, how any
changes to their business model or strategy in recent
years may impact each stakeholder group.

Financial Reporting Council

FRC expects companies to identify their key
stakeholders and explain their relevance in the
context of their strategy. Companies should also
be identifying key issues relating to each group.

Almost all companies in our sample identified their key
stakeholders and reported on why they engage with each
group, which is commendable. However, it appears that
many companies engaged with their stakeholders in an
ad-hoc manner and it was often unclear why they have
decided to engage with some of their key stakeholders
and not others.
A better approach was observed where the company
distinguished between those stakeholders that impact
the company and those which are impacted by the
company. Reporting was further enhanced where the
company clearly linked each stakeholder group and
relevant issues to its corporate purpose and strategic
objective.
The FRC Lab issued its ‘Hints and Tips’ for S.172
reporting and will publish a further report in the coming
month.

“Failure to embrace stakeholder governance
could be the most significant risk factor, outside
of liquidity, facing most businesses over the next
ten years.”
Board Intelligence2

2 Board Intelligence, Navigating the New World of Stakeholder
Governance (2020)

https://www.frc.org.uk/getattachment/dda7a2e4-fd50-4710-8ed6-860867aebf24/Lab-Tips-on-s172-Oct-2020-(002)

https://www.boardintelligence.com/the-board-report-stakeholder-governance

https://www.boardintelligence.com/the-board-report-stakeholder-governance

24Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

UNDERSTANDING
STAKEHOLDER VIEWS

Even where companies did report on outcomes, these
were couched in general terms. For example, after
describing their methods of stakeholder engagement,
some companies referred to outcomes such as ‘good
relationship with suppliers’ or ‘improved efficiency’. In
other cases, companies referred to ‘outcomes’ which
were, in reality, processes.

EXAMPLE

One company stated that its Investor Relations
team provided the board with regular feedback on
investors’ views and key market issues, without going
into any detail about what kind of feedback they had
received nor the key market issues.

“Even where companies have yet to response
to a feedback, they should be stating how and
when they intend to take action in respond to
that feedback.”

Financial Reporting Council

Although almost all companies report on some form of
stakeholder engagement, what a company refers to as
‘engagement’ is often a one-sided exercise, such as
providing presentations or visits to supplier/customer
sites. While these activities certainly have the capacity
to become meaningful engagements, companies rarely
demonstrated how these have enabled them to better
understand the needs and views of their stakeholders.

FRC expects companies to take action to
understand the views and needs of their
stakeholders and report on such engagements.
Engagements should promote a dialogue between
stakeholders and the company.

Of the companies that have detailed the ways in which
they collected stakeholder views, only a few companies
report on how that feedback has helped inform their
decisions. Better reporting practice was observed where
the company explained clearly:
• How they engaged with the relevant stakeholders;
• The specific feedback they received; and
• The action they have taken in response to those

stakeholder views

EXAMPLE

For example, one company in the financial services
sector reported that it received feedback from a
number of sources (its annual survey, real-time
client experience survey and third-party surveys that
benchmark its performance against competitors)
which told them that clients felt that the company
should simplify its processes and make better use
of digital technology. The company also took into
account the increasing demand for sustainable
finance products and a number of specific examples
of digital platforms in specific areas of the business
and in different countries which have enhanced client
experience in the past. The company then listed the
various examples of action taken in response to the
feedback it had received, including improvements in
the design of their digital platforms.

We found, generally, that companies are not reporting on
the effectiveness of their stakeholder engagements and
how those have contributed to the companies’ long-term
success.

25Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Stake
holder

feedback Employee
feedback

Community
feedback

Supplier
feedback

Shareholder
feedback

Compliance

Number of
complaints

Order
Intake

Total
benefits and
payments to
employees

Employee
Turnover

rate

Net
promoter

score

Total
shareholder

return

Customer
feedback/

satisfaction

% of
payments

made within
payment terms

Charitable
donations and
participation

WORKFORCE

% of
supplier code

of conduct
certifications

SUPPLIERS

GHG
emissions

Total
dividends

Paid

Earnings
per share

INVESTORS

CUSTOMERS

GOVERNMENT
AND

REGULATORY
BODIES

COMMUNITIES

Energy
use

ENVIRONMENT

PERFORMANCE
METRICS BY

STAKEHOLDER
GROUP

Financial Reporting Council

Measuring the performance of stakeholder engagements

FRC expects companies to report a coherent
narrative on their approach to measuring the
performance of their engagement strategies.,

Although stakeholder relationships are difficult to
measure, the disclosure of stakeholder engagement
performance metrics shows a recognition of stakeholders
as a source of differentiation and risk and can help
companies achieve their strategic objectives.

Only a small number of companies within our sample
provided details of key metrics or signposted to
information explaining how they had measured the
success of engagements with each stakeholder group.

Of those companies that did provide performance
metrics, there were variations in the metrics used to
measure the performance of engagement methods.
Where companies used just one metric or provided only
metrics which related directly to financial performance
(such as number of payments made to suppliers on time)
the outcome was far less satisfactory.

26Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Don’t

Do

• Use simple performance metrics (e.g., number of
supplier payments made on time)

• Focus on metrics relating to financial performance

• Use metrics that provide insight into risks and
opportunities (e.g., stakeholder feedback)

• Report on performance weightings and weighted
performance outcomes

• Report on difficulties as well as positives

• Explain why trade-offs were necessary in the short
term

A more comprehensive and accurate representation
of the performance of stakeholder engagements was
achieved where the company utilised a combination of
performance metrics.
For example, when reporting on customer engagement,
instead of using simple metric such as ‘number of new
customers’, some companies used customer satisfaction
surveys as a measurement of customer engagement in
addition to the number of complaints as a KPI. Methods
of measuring stakeholder engagement which relate to
stakeholder perception are better as they provide greater
insight into the potential risks and opportunities relating
to each stakeholder group.
The company’s narrative should also describe how
information relating to each metric is passed to the board
and how often the board assesses each metric. Reporting
was further enhanced where the company stated the
weighting of each metric (e.g., 30% of performance)
against its weighted performance outcome (e.g., 22%).

Considerations for reporting on stakeholder
engagement:

Financial Reporting Council

FRC expects the information provided to be a
fair and honest assessment of the company’s
performance in relation to stakeholder
engagement, including the identification of any
areas where they failed to meet targets.

By acknowledging their failures and demonstrating
elements of their strategy which will improve
performance, companies can effectively demonstrate the
resilience of their business model.

We also found that many companies (and particularly
larger companies) report on decisions which do not,
to any significant degree, impact stakeholders beyond
shareholders and/or employees.

Financial Reporting Council

Reporting on Key Decisions

FRC expects companies to report on how the
board has reached key decisions and the likely
impact of those decisions, including how it has
taken account of the company’s stakeholders in
doing so.

KEY MESSAGE

Whilst most companies reported on at least one
principal decision that impacted its stakeholders,
these were often routine decisions which did not
involve difficult stakeholder trade-offs.

As such, reported ‘principal’ decisions were often routine
decisions which typically occur on a yearly basis (e.g.,
remuneration decisions, pension plans, capital allocation)
but do not significantly impact wider society.

27Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Don’t

• Confine decisions to routine decisions which do
not involve the need to make difficult stakeholder
trade-offs

• Use boilerplate language when reporting on key
decisions

Our findings align with a recent report by Board
Intelligence which found that 57% of boards say their
biggest stakeholder governance challenge is a strong
focus on one or two stakeholder groups, with not enough
time spent on others.

KEY MESSAGE

Within principal decision disclosures, there were
also huge variations in the level of detail provided
and level of analysis. Boilerplate reporting on
principal decisions was common.

We welcome reporting on decisions which involve the
need to make difficult stakeholder trade-offs. Examples
included: the sale of the business in a particular country;
a new partnership; building of a new site in a certain
location; restructuring to transform the company’s
e-commerce capabilities; and the acquisition of a digital
platform.

EXAMPLE

Many companies reported that they had “balanced
the needs of their key stakeholder groups” in coming
to a key decision, “they considered the risks and
benefits of the proposal”, or that “feedback from
stakeholders helped the board arrive at the most
appropriate decision”, without providing any further
detail about the interests of each stakeholder group
and any specific benefits/risks that would result from
the company’s principal decision(s).

Do

• Provide examples of key decisions where the
company has taken stakeholder interests into
account

• Report on the specific risks and opportunities to the
company and each impacted stakeholder group

• Explain the contribution of each principal decision
to the company’s long term success

Considerations for reporting on key decisions: Reporting was better where companies were specific
about which stakeholders would be impacted and
information taken into account in coming to that principal
decision.

One company, for example, reported on the decision-
making process that led to their new diversity and
inclusion policy:

EXAMPLE

The company recognised that such a policy would
help the company achieve its aim of recruiting a more
diverse workforce, which in turn would better reflect
the diverse customer base of the Company. The
company also considered the impact of the decision
on specific customer contracts and the fact that the
new D&I policy would align with the values of key
customers.

That company also reported on their consideration
of a number of studies that demonstrated that
companies with greater diversity in leadership
positions were more likely to outperform their national
industry median on EBITDA margin, whilst companies
with the least diverse leadership for both gender and
ethnic/cultural diversity were less likely to achieve
above-average profitability.

https://www.boardintelligence.com/the-board-report-stakeholder-governance

https://www.boardintelligence.com/the-board-report-stakeholder-governance

28Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Transparency was further enhanced where the company
reported on the risks and opportunities related to the
decision, any due diligence carried out, and the process
by which the board received the appropriate information
relating to relevant stakeholder groups (e.g., where the
board consulted the Chief Risk Officer).

FRC expects companies to provide evidence to
support their statements when they are reporting
on the performance of particular decisions, which
may come in the form of figures (e.g., the decision
generated X new jobs, increased shares by X
amount, generated X new customers in market Y)
or case studies.

“Much of the reporting was boilerplate and/
or vague in nature, with some companies
stating merely that the views of stakeholders
were “considered in the normal cycle of board
meetings.””

TOP TIP

Include prompts on stakeholders and Section 172
duties in templates for board agendas, papers
and minutes as reminders for both the board and
management.

Financial Reporting Council

Concerningly, the majority of companies who did report
on their principal decisions, did not make any statement
on the contribution of those decisions to the company’s
long-term success.

This is in line with Grant Thornton’s finding that only 12
companies (4%) in the FTSE350 illustrate the long-term
impact of board decisions in the context of stakeholder
considerations.

EXAMPLE

A number of companies in our sample used vague
statements such as “the decision led to positive
results for all key stakeholders” and/or “the board
continues to monitor its success”.

Board oversight of stakeholder decisions

We found that only a very small minority reported on
these aspects and when they did, these largely focused
only on information relating to the workforce and/or
shareholders.

Transparency was enhanced where the company
reported on not only how the board engaged directly
with shareholders (e.g., visits, Q&As), but also where
they stated who, or which department, is specifically
responsible within the company for engaging with certain
stakeholder groups and escalating information relating
to those stakeholders to the board (e.g., CEO, Investor
Relations team, HR department, Health & Safety, Legal
team).
A small number of companies are disclosing the training
received by directors to help them fulfil their duty under
s.172, including training on key stakeholder issues (e.g.,
bespoke inductions, training and masterclasses on
specific ESG issues).
A number of companies reported on their requirement
that all papers submitted to the board for decision
include a checklist of these factors, stating, firstly,
whether or not the factor is a relevant factor in taking
the decision; and secondly, where there is a relevant
factor to be considered, a short description of the issue
or reference to the section of the paper where the factor
is discussed. These are elements of reporting that we
expect to see more of next year.

FRC expects companies to report on how the
board oversees stakeholder decisions. Issues
include how, and on what basis, stakeholder
information is passed to the board, as well as
on how often the board reviews engagement
methods.

Financial Reporting Council

https://www2.grantthornton.co.uk/corporate-governance-review-2020.html?_ga=2.219568793.1858315815.1605520465-221054369.1602605107

29Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Reporting on mechanisms for stakeholders to raise issues
independently
Having a mechanism for stakeholders to raise issues
independently helps strengthen the continual dialogue
between the company and its stakeholders.

No. of companies that report on mechanisms for
stakeholders to raise issues independently

However, there were variations of level of detail provided,
particularly in respect of the effectiveness of complaints/
grievances mechanisms.

KEY MESSAGE

Although almost all companies report on some
form of stakeholder engagement, engagement
beyond the workforce is almost invariably driven
by the companies themselves.

The majority of companies in our sample did not report
on a mechanism for stakeholders to raise issues of
importance independently. Where companies did
have such a mechanism, these were largely limited to
employee whistleblowing processes.
A minority of companies reported on complaints,
grievances or ‘raising concerns’ platforms for all
stakeholders.

20%

15%

10%

5%

0%

18
17

Percentage of companies
that have a mechanism
for stakeholders beyond

employees to raise issues
of importance (e.g.,
customer or supplier

hotline)

Percentage of
companies that have
a mechanism for all

stakeholders to raise
concerns

TOP TIP

Explain clearly the purpose of stakeholder platform
and provided an overview of its performance for the
year. This could include the number of complaints
received, investigated and resolved.

30Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Our analysis suggests that the reporting in this area
is wide-ranging, with many companies explaining the
different approaches used to tackle engagement with
the workforce. Popular ways of engaging included the
use of an employee survey, town halls and site visits by
members of the board.

Four companies within our sample of 100 did not comply
with one of the suggested mechanisms or an alternative
listed under the Provision. While the majority disclosed
their choice of mechanism or alternative, it was still
unclear why the method selected was considered most
effective for the company.
The same concerns are also reflected in the workforce
engagement research project which was commissioned
by the FRC and is being conducted by the Involvement
and Participation Association (IPA), in partnership with the
Royal Holloway University of London (RHUL). Although
the report will not be published until early 2021, we have
some interim findings which we will refer to in this report.
As part of the disclose related to the mechanism used
we expected companies to report that the decision was
made following some degree of discussion with the
workforce. However, in the majority of cases, we found
almost no reference to employee discussion/participation
in making the decision.

FRC expects further clarity to ensure that
investors and stakeholders are aware of how
companies engage with their workforce.

Financial Reporting Council

Under Provision 5 of the Code, processes are
required for the board to understand the views of
the company’s workforce and describe in the annual
report how their interests have been considered in
board discussions and decision making.4

WORKFORCE FOCUS

Did not adopt any of the three
options
Chose to appoint a NED
Chose an advisory panel
Chose a NED + Advisory panel
Workforce director

40.0%

11.7%

16.0%
31.7%

Most popular
mechanisms
of including
employee
representation on
company boards

The chart includes
280 companies in the
FTSE350. Investments
trusts with no employees
and firms with fewer
than 50 employees were
discounted.3

0.6%

3 Data was obtained from the Involvement and Participation
Association in partnership with Royal Holloway University of
London

4 The use of ‘workforce’ is for Code purposes and not meant
to align with legal definitions of workforce, employee, worker
or similar.

It is important to note that in some disclosures there
remained a degree of difficulty in identifying whether
a method chosen was one of the three suggested
mechanisms or an alternative arrangement.

31Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Recurring themes from our analysis are set out below:

Non-executive Director

The majority of companies highlighted
that this was the most appropriate
method. However, information on the
NED’s role tends to be ambiguous and
limited in some cases.

There appears to be a reliance on
looking at the results of staff surveys
and the use of site visits led by the
NED to ensure employee voices are
heard at board level.

We noted a lack of substantive
information on the decisions/
outcomes as a consequence of the
NED’s activity.

Reports did not on the whole set what
was required of NED’s to succeed in
the role, and we were left with a feeling
that it was up to them to work out
how to engage.

Workforce advisory panel

Compared to the information provided
for the roles of the NEDs, this
mechanism provided a more robust
and structured process for obtaining
employee views.

Difficulty in establishing how the
activities of the panel have impacted
board decision making. In some
cases, the panel is used for the board
to explain decisions already taken.

Some companies have adopted
a hybrid model with a designated
NED who chairs the panel. Such
an arrangement allows for two-way
communication between employees
and the board.

Many companies noted that these
panels had only just been set up.

Alternative arrangements

The majority of companies refer to having either
too small or too large workforce as the reason
why they have not adopted one of the three
mechanisms listed under Provision 5.

Whilst some stated that their existing practices
are adequate, many suggest that they are
enhancing their current engagement processes,
but do not provide any additional information on
how it will be delivered.

Some companies highlight the importance of all
NEDs engaging with the workforce to understand
the workforce views, however, the majority of the
firms in this group appear to be reliant on the use
of an annual engagement survey. Occasionally,
this form of engagement is supplemented
with the use of Q&A sessions and informal
interactions.

Workforce Director

Only two companies
within our sample used
this approach, therefore
it is insufficient to draw
conclusions from this
method.

32Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

Alternative arrangements

Companies highlighted the challenges of using one of
the three workforce engagement mechanisms suggested
in the Code, and stated that their existing methods are
adequate – but not always with a reason why the current
method of engagement is effective.

Many companies noted the challenges in obtaining views
from a global workforce across multiple countries which
necessitated the need for multiple engagement methods
suitable for individual jurisdictions, whilst companies
with fewer employees highlighted that their employees
have regular access to senior staff through meetings and
‘informal events’ and therefore a mechanism listed under
Provision 5 was not suitable.

The better reports detailed any well-established and
effective formal mechanism of engagement, such as
meetings involving the chief human resources officer
or the chief executive; alongside the workforce and
trade union representatives, and the use of anonymous
reporting hotlines through which concerns can be
brought to the board’s attention.

A minority of companies suggested that plans were being
made to enhance their current engagement methods.
For example, that to meet the expectations of the Code,
one company has decided to involve one or two NEDs in
town hall meetings.

However, there were instances in which companies
did not to provide details of how methods have been
enhanced and simply provided boilerplate language;

EXAMPLE

One company stated that the board has “….
dedicated considerable time during the year
to oversee implementation of a robust culture
framework and ensuring employee voices are heard
in the boardroom”.

Overall, our analysis highlights that this approach
tends to provide weaker responses as to why such
arrangements are effective.

Non-Executive Director

“Many companies did not mention why their
existing activities are effective in understanding
the views of the company workforce, in line with
the Code at Provision 5.”

FRC expects companies to fully explain why their
method of employee engagement is effective. This
can be reported through examples of discussions
in relation to the impact of the engagement on
decision making.

Appointing a NED to engage with the workforce was the
most common mechanism used. This also correlates
with the findings of IPA and RHUL in which over 112
companies in the FTSE350 chose this approach. In
some cases, the role of designated NED expanded to
two or three individuals to ensure accessibility in each of
the company’s respective regions. One company within
our sample highlighted that, due to having over 80,000
employees across 40 countries, a workforce NED was
insufficient and the role should be undertaken by the
corporate responsibility committee.

Companies that chose the NED approach often
highlighted that it offered the director the opportunity to
get insight into employee views throughout the company
and share them with the board. However, very few
companies reported why this arrangement was effective,
for example, it was not clear if a report from the NED was
a standing item on the board agenda, or alternatively
what criteria the NED used to raise matters to the whole
board.

Alternative arrangements reported by companies not
choosing one of the suggested methods included
relying on the information from the annual employee
engagement survey and informal activities, such as
Q&A sessions, lunch with board members and the use
of blogs and videos on the company’s intranet. It was
generally not apparent from these explanations how any
issues raised affected board decision making.

33Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

This is further evident from the IPA and RHUL research
which found that one in five companies described an
existing NED as simply being ‘approached and asked
to take on the role’ without reference to a wider board
discussion on why they were considered to be the right
candidate for this position.
Companies also did not report adequately on what
is expected of a workforce NED. In almost all cases
it appeared to be that driving the work forward was
left to individuals and no little direction given on time
to allocate to this activity. To ensure that a Workforce
NED is effective, expectations should be set out prior to
someone accepting the role.

FRC expects companies to adopt an effective
method of workforce engagement in order to
deliver meaningful and regular dialogue with the
workforce and aim to strengthen the employee
voice in the boardroom. Such dialogue needs to
be explained clearly and effectively for the Code
Provision to be met.

The reported activities of NEDs differed between each
company but included site visits, lunches, participating
in town hall meetings and employee focus groups, all of
which allowed employees to raise their views directly to
the representative director. However, it was not always
clear whether these kind of interactions were ad hoc or
focused, and if or how the views reached other board
members. Better engagement will be achieved when the
workforce is able to consider issues in advance and there
is a specific focus to such interactions.

There was also a substantial reliance on the annual
employee engagement survey and site visits to different
parts of the business. The IPA and RHUL research
discovered that out of the 61% of companies that
responded to their survey stating that they had a
designated NED, the NED was most commonly asked to
consider the results of staff surveys (81%) and attend site
visits which is undertaken by 84% of designated NEDS.

In some cases, the NED is simply required to
complement the survey process whilst the human
resource function reports findings to the board. When
reporting on such matters, it would be useful to
determine exactly what value is added by the NED.

Although our concerns regarding the use of surveys as
the only way to engage have been dealt with elsewhere
in the report (see our analysis on culture), we would also
like to draw attention to the comments highlighted in
the Guidance on Board Effectiveness which expressed
that while the annual survey can be a useful source of
information, it is not sufficient on its own as an indicator
of workforce views.

Financial Reporting Council

FRC expects reporting to clearly set out the
impact of the involvement of the NED on
workforce engagement.

Defining the role of the workforce NED:
• Set out the board’s expectations
• Agree on what activities the NED should

undertake e.g., host specific engagement events,
chair a working group

• Consider whether additional training is needed
• Consider how the role might be supported by HR

or internal audit
• Define how often the NED should report to the

board
• Define how the NED should report – formal

agenda Item or other methods
• Discuss the kinds of issues that should be

brought to the board and which should be dealt
with by committee or executive

• How the role will add value to current
engagement activities

TOP TIP

https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

34Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Advisory panel

Structured approaches can also enhance effectiveness
as the workforce will be more confident that their views
will be heard by the board. However, we are yet to see
whether such activities stemming from the panel have
influenced board decision making, partially due to the
fact that many of the panels at the time of reporting had
only recently been set up.

Some companies provided examples of initiatives they are
committed to carrying out as a result of a panel, such as
including greater access to training and opportunities to
further develop the reward strategy. However, we would
welcome more clarity on whether training courses for the
panel members are provided and if gender, ethnicity and
age are considered in their selection and appointment to
ensure there is a fair representation of the wider workforce.
In the survey conducted by IPA and RHUL, they noted that
only a third of the advisory panels were fully elected by the
workforce, with the remaining two-thirds being described
as a combination of elected and appointed.

Some companies opted for a hybrid mechanism which
combines a designated NED with an advisory panel.

EXAMPLE

One company made the following observation about
making the NED the chair of its panel:
“…provided the board with a better understanding of
the views of the employees and greater clarity on the
culture of the company.”

In such cases, the NED tends to discuss the results of
the survey with the panel and the themes arising from
such discussion are shared with the board. Chairs of the
panel can also be invited to board meetings, and around
25% of firms that responded to the survey by IPA and
RHUL sent written reports from their advisory panel to be
presented at board meetings.

Overall, whilst many companies highlight that their
mechanism allows for two-way engagement, we are yet to
see whether activities arising from panels have impacted
board decision making in any way.

Workforce director
Only two firms within our sample employed worker
directors meaning there is insufficient evidence to draw
conclusions from this method. However, the companies
that did adopt this method highlighted that they appointed
two workforce directors in order to get direct views from
the workforce. Information on training and support was
provided and there were indications to suggest that the
workforce directors took part in board discussions on all
issues that were presented to the board.

KEY MESSAGE

Our analysis highlighted that elements of good
practice are evident in this area and signs of
advanced development and structure were
prevalent when a workforce advisory panel was
the chosen method. A formal structured approach
was relatively common and evidence of a direct
two-way communication system were present in
many reports.

However, neither report explained in sufficient detail how
workforce views had been obtained.

We would encourage other companies to consider
either this option or other ways in which workforce
representatives could attend the board to offer views and
feedback from the workforce.

Overview of outcomes
It is important to ensure that the approach to workforce
engagement delivers meaningful and regular dialogue
with the workforce and evidence is provided within the
report to show that such dialogue is brought to the
board’s attention.

We were surprised at the lack of discussion with the
workforce as to what would be the most effective way to
engage with them.

Financial Reporting Council

FRC expects outcomes from either form of
employee engagement to be illustrated within the
report, alongside views and workforce concerns
that ought to be taken on board. In addition,
feedback from management should be provided
on how the situation has been dealt with.

35Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Remuneration committee workforce engagement
For the first time, the Code explicitly set out that
remuneration committees should engage with their
workforce. It describes two main strands to such
engagement – Provisions 33 and 41.

These engagements were predominantly led by the
company and did not appear to allow much, if any, room
for a response from the workforce. It was quite often
unclear how such one-way engagement resulted in the
RemCo taking the workforce into account when setting
the remuneration policy.

However, there is a key difference between Provisions
33 and 41. Provision 33 focuses on how companies
factored their workforce’s circumstances into setting the
remuneration policy. Provision 41, on the other hand,
examines the discussions between the workforce and
the RemCo regarding the policy, any feedback that the
RemCo received, and any actions that it took in response
to such feedback.

When we considered the application of Provision 41, we
were unable to find any annual reports that described
any feedback that was received from employees by the
RemCo, and any consequent follow-up actions. Some
companies did report that this was an area that they
were still working on and would report on next year.
However, we found that some companies that had
claimed full compliance with the Code were not, in fact,
in compliance with this part of Provision 41.

When reporting against Provisions 33 and 41, RemCo
should offer additional clarity on the matters they
have taken into account in relation to the workforce’s
remuneration policies and incentives when setting the
remuneration policy for executives.

Provision 33 of the Code states that the RemCo
should take the workforce’s remuneration
considerations into account when setting the
remuneration policy for executive directors.

Provision 41 states that the annual report should
describe the work of the RemCo, including:
“what engagement with the workforce has taken
place to explain how executive remuneration
aligns with wider company pay policy.”

KEY MESSAGE

RemCo should also engage with their workforce
meaningfully, ensuring there is a two-way
dialogue. Good practice would be to separate
engagement on executive remuneration policy
from other workforce engagements to ensure a
focused discussion.

Financial Reporting Council

FRC expects to see an improvement in
companies reporting the steps that they have
taken to engage their employees on their
remuneration policies.

Our review last year noted that very few RemCos
reported on their workforce engagement in relation to
executive remuneration, but the majority acknowledged
that they would address this area in 2019.
Many companies stated in their annual reports that
they had taken workforce remuneration, workforce-
related policies, and the alignment of incentives and
rewards into account when setting policy for executive
director remuneration under Provision 33. However, few
companies provided further detail. Examples of common
reporting included: Engaging through briefing and guides;
the employee champion providing information to or sitting
on the RemCo; and collecting information as part of staff
surveys.

36Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

SHAREHOLDER FOCUS
To review to what extent companies are being responsive
to shareholder concerns, we used the Investment
Association’s Public Register which tracks significant
opposition by shareholders to a resolution, or any
resolution, withdrawn before a shareholder vote at listed
companies.

Our analysis of companies which were due to submit
their six-month update after the shareholder meeting by
31 October, as per Provision 4 of the Code, revealed that
40% of companies did not make any announcement.
This inaction is deeply concerning as it highlights a further
area od non-compliance of the Code and indicates a lack
of regard for significant shareholder concerns.

By looking at companies within our sample which
received 20% or more votes ‘Against’, and as such
were listed on the Public Register, 40% of them
faced shareholder dissent purely due to remuneration
concerns, whether relating to remuneration policy, report
or proposed share scheme.

Provided an update to the IA

Didn’t provide an update to the IA but posted it on the
company website

Didn’t provide any update

0 10 20 30 40 50 60 70 80 90 100

37 23 40

“Within our sample of companies that received
20% or more votes ‘Against’ on remuneration
grounds, 56% have previously received significant
opposition by shareholders relating to the same
resolution, some more than once, which is a red
flag.”

Financial Reporting Council

FRC expects companies to genuinely engage
with a wide spectrum of their shareholders,
not only the largest few, to understand and try
to address their concerns as far as practically
possible. Also, views received from shareholders
and other stakeholders, and actions taken, need
to be communicated, in a clear manner and within
specified timeframe.

While we recognise that not all issues can be resolved
immediately, we would expect companies to at least
demonstrate their active engagement with shareholders,
and other stakeholders, with a view to resolving any
contentious points, not simply to discharge their duty.

Unfortunately engagement too often resembles an
information campaign, rather than a discussion.
For example, 67% of companies within our sample
encountering significant opposition by shareholders due
to remuneration issues, appear not to have addressed
shareholder concerns at all. Such a high number is
particularly worrying considering the concerns related
to, among other things: overcomplexity of certain
remuneration schemes; disproportionate salary increases
for top executives; RemCo discretion; post-employment
shareholding requirements; and pension entitlements – all
points clearly addressed by the Code.

Responsiveness to the views of shareholders and wider
stakeholders is one of the key requirements of the Code
and s.172. It should stem from the company’s culture
and be underpinned by integrity, transparency and
accountability – all crucial elements of effective corporate
governance.

Grant Thornton’s recent report reflected our findings,
stating that just 10% of companies in their FTSE350
sample specified actions taken as a result of information
collected from shareholders.

https://www.theia.org/public-register

https://www2.grantthornton.co.uk/corporate-governance-review-2020.html?_ga=2.219568793.1858315815.1605520465-221054369.1602605107

37Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Do not describe their
payment policies in their
annual reports

Described either their
standard payment term
timelines or early payment
facilities for suppliers

Clearly described their
payment policies

13

27

60

SUPPLIER FOCUS

Whilst carrying out our research, two issues relating to
suppliers merit particular attention:
Payments to Suppliers
The issue of late payments to suppliers is a longstanding
one. The effects range from causing suppliers to experience
financial difficulties to unnecessary business failure.
In our review last year, we noted that reporting on
supplier payments would be one way to demonstrate
having regard to those matters referred to in section 172.
We were therefore expecting more companies to
report on this element of engagement, evidencing a
discussion at board level on payment policies or reporting
that a company is a signatory to the governments
Prompt Payment Code (PPC). It is an effective way
of demonstrating how a company works with, and
considers issues of importance to, its suppliers.

KEY MESSAGE

We were disappointed that more companies
did not report on channels of engagement with
suppliers and their importance as a source of risk.
Failures and concerns within the supply chain will
impact the success of the company, even if only in
the short term.

KEY MESSAGE

Boards should review their prompt payment
policies on a regular basis and have mechanisms in
place for being alerted to problems with payment
expectations.

Within those companies that did describe their payment
policies, 92% did not discuss them at the board-level,
which is disappointing given their reputational, strategic,
and s.172 importance.
Furthermore, only 11% of our sample were signatories
to the PPC, with one company reporting it had been
reinstated following a suspension. Roughly half of these
were FTSE100 and FTSE250 respectively.

“Engaging meaningful with suppliers is not simply
about being a good corporate citizen, but also
about discharging directors’ duties under s.172 and
mitigating risk in company supply chains.”

We found that meaningful engagement with suppliers,
or reporting on supplier engagement with outcomes,
was very rare. Indeed, in their recent research, Board
Intelligence found that just over one third of FTSE350
companies saw a clear connection between their
suppliers and their financial performance.

We found that engagement with suppliers was usually
limited to supplier polices and codes of conduct and did
not involve two-way communication. Simply because
a company has produced a code of conduct does not
mean suppliers are actively engaging with it.

Whilst a few companies reported on a general ‘hotline’
for stakeholder concerns, there was little detail of the
effectiveness of these in terms of supplier engagement.
Similarly, some companies referenced supplier surveys
without providing any indication of how feedback from
these engagements informed decision making.

Modern Slavery
It was disconcerting that although many companies
made a reference to the Modern Slavery Act, very
few mentioned it in their s.172 statement and only a
small minority of companies had engaged with their
suppliers on the topic. The issue of modern slavery was
often described solely through the lens of employee
engagement, with companies failing to address the
supply chain dimension.
Of those who did report on supplier engagement on
this issue, good practice was seen where the company
reported not only on the process/actions taken to engage
their suppliers (e.g., enhanced due diligence; checked
publishing of Modern Slavery Statements) but also on
the outcomes of those engagements (e.g., discontinued
business; received assurances).

Reporting on payment policies

https://www.boardintelligence.com/the-board-report-stakeholder-governance

38Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

In response to the COVID-19 pandemic, a number
of companies have started to pay closer attention to
their supply chains. Many have made commitments to
improving their visibility and introduced processes to
ensure that the board is kept informed about any impacts
on suppliers. This is something we will look at for next
year.

SOCIETY FOCUS

Environment
Although the Code does not include any specific
Provision on environmental issues, a number of
the Code’s Principles cover matters relating to the
environment, including the requirements to assess and
manage the company’s risks, the board’s responsibility
for narrative reporting and for engagement with wider
stakeholders.

As such, we would expect almost all Premium listed
companies to consider the impacts of climate change
on their business model and report on the actions they
are taking to mitigate climate-related risks and ensure
resilience and long-term success.

In November 2020 the FRC published its
Climate Thematic, a cross-organisational project which
aimed to assess current responses by companies
to climate change and to set expectations for future
reporting. Along with the Thematic, the FRC issued a
statement signaling its support for additional reporting in
this area:

KEY MESSAGE

While many companies are disclosing approaches
to climate governance it was often unclear how
consideration of climate-related issues inform key
decisions or the business model or strategy. This
consideration was even less obvious amongst
smaller cap companies.

We were pleased to see that many companies are
reporting that action on climate change is essential for
their long-term success. Many businesses have pledged
to becoming ‘net zero’ in line with the UK Government’s
target to decarbonise the economy by 2050 and/or
aligned their strategy with the goals set out in the Paris
Agreement.

KEY MESSAGE

Many companies have clear governance
structures in place for the identification and
management of climate related risk, but it was
often unclear whether climate considerations had
been given sufficient attention on board agendas,
as few companies went into detail regarding any
key decisions the relevant individuals or bodies
have made.

FRC review concludes that corporate reporting
needs to improve to meet the expectations of
investors and other users on the urgent issue of
climate change.

FRC supports the introduction of global standards
on non-financial reporting, but, as an interim
step, encourages public interest entities to report
against the Task Force on Climate-related Financial
Disclosures’ recommended disclosures and the
Sustainability Accounting Standards Board metrics
for their sector.

As part of the Climate Thematic we considered 60
companies from our wider sample.

Others reported on the process by which climate risks
and opportunities are reviewed. Whilst a number of
companies have one named director responsible for
climate-related issues, some others report that climate
risks are the responsibility of the whole board or relevant
committee.
We recognise that there is no one-size-fits all approach
to climate governance and companies are encouraged
to carefully consider which kind of climate governance
structure is most appropriate for their business model.

For the few small cap companies assessed, we were
disappointed to find that that there was very little
reporting on climate change governance.

https://www.frc.org.uk/getattachment/ab63c220-6e2b-47e6-924e-8f369512e0a6/Summary-Final

https://www.frc.org.uk/news/november-2020/climate-pn

39Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

Financial Reporting Council

For a more detailed analysis of our climate-related
governance findings, see pp11-46 of the corporate
reporting section of FRC Climate Thematic, where you can
find information on the following issues:
• TCFD Disclosure
• Small Cap Reporting
• Risks and Opportunities
• Impact of Business on Environment
• Environmental KPIS
• S.172
• Stakeholder engagement

FRC expects companies to report how climate
and environmental issues are considered at board
level and the impact this has on decision making,
taking into account any reporting against TCFD
and SASB.

Communities
Whilst many companies listed communities as a key
stakeholder, they often failed to provide examples of
specific community engagements and rarely reported
on issues discussed with community members beyond
the workforce. Some companies vaguely commented
on having a positive impact on a community but did not
elucidate further.

KEY MESSAGE

Companies should be reporting on the steps taken
to ascertain the views of all relevant stakeholders
and describe what action they have taken to better
meet the needs of their community.

EXAMPLE

There were, however, some instances of good
reporting within our sample. When reporting
on community engagement, for example,
one company reported that employees asked
for clarity and consistency in the company’s
approach to charitable giving so that they could
make recommendations for deserving causes
that could be helped either financially or with
volunteering efforts. The company responded by
launching a new charitable giving programme,
comprising information on ‘company match’
donations, how to seek assistance with local
charity support, and an expansion of their
‘Volunteer Time Off’ employee programme into its
Asia-Pacific community.

Community engagement seemed largely to consist in
donations to local charities, for example local schools or
hospitals, and did not involve active engagement by the
company with members of the community.

https://www.frc.org.uk/getattachment/ab63c220-6e2b-47e6-924e-8f369512e0a6/Summary-FINAL

40Guidance on Board Effectiveness 2018Corporate Governance Report November 2020 Financial Reporting Council

5. CONCLUSION
As we stressed in the introduction to the 2018 Code:
“Successful and sustainable businesses underpin our
economy and society by providing employment and
creating prosperity”, with effective corporate governance
being an important enabler. Unfortunately, the outcomes
of our monitoring suggest that many companies are
still more focused on the process than on meaningful
reporting.

The Code should not be perceived purely as a
compliance exercise. It is designed to help boards look
at company policies and practices through the lens of
corporate governance best practice, assess what works
well and what could work better, and use the flexibility
offered by the Code to change, where needed. Over time
this will improve the resilience and long-term success of
the business. As such, we discourage companies from a
tick-box approach to reporting on the Code, and instead
urge them to embrace the aims of the Principles.

The strongest and most insightful reporting came from
companies that described not only the initiatives that
were introduced and processes that were followed, but
also discussed their outcomes and what impact they
had on the business. From risk review, through board
evaluation to stakeholder engagement, measuring
and reporting on impact means moving away from the
boilerplate statements towards meaningful reporting.
Giving more emphasis to the impact, while not
disregarding thorough process, will also help companies
better assess the effectiveness of their governance and
generate better company performance and outcomes for
shareholders and stakeholders.

With a plethora of Environmental, Social and Governance
(ESG) issues rising in prominence and attracting greater
government and public attention, ignoring best practice
guidance generates greater risk. On the occasions
when boards choose to depart from the Code, they
need to explain more clearly why they chose to do so
and how the alternative arrangements are in the best
interests of the business and its stakeholders. To help
those companies that are struggling with the application
of the Code, and those that claim compliance without
fully doing so, The FRC will be taking steps to engage
with them to better understand the basis of the chosen
approach.

The pandemic has forced many companies to reconsider
their purpose, strategy and relationships with their
stakeholders. Those companies that were better
aligned with expectations of the Code and s.172 of
the Companies Act 2006, were more equipped to face
those challenges. Those that demonstrated a healthier
corporate culture and better stakeholder engagement
showed better resilience. This is something that
stakeholders will be carefully looking at when 2021
annual reports are published.

The year ahead brings even more challenges. Boards will
need to ask some of the hardest questions, ensuring that
the varied risks associated with Brexit, COVID-19 and
Climate Change are effectively managed and mitigated in
company operations and strategy. Over the next year we
will be carefully monitoring how companies are reporting
on the impact of risks which have manifested themselves
and how boards are responding in terms of improving
their governance.

With growing focus on the social issues, we will review
how directors are discharging their s.172 duty, in
particular the quality of stakeholder engagements, the
extent to which they have informed board decisions and
how effectively companies are responding to concerns
raised.

Financial Reporting Council

FINANCIAL REPORTING COUNCIL
8TH FLOOR
125 LONDON WALL
LONDON EC2Y 5AS

+44 (0)20 7492 2300

www.frc.org.uk

http://www.frc.org.uk

About the FRC
1. Foreword
3
2. Executive Summary
3. Reporting expectations
4. main findings
A. Code Compliance
B. Leadership
C. stakeholder engagement

24
24
33
5. conclusion

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