New rules to end ‘rewards for failure’ in boardrooms are to be unveiled by ministers this week with the release of a long-awaited white paper on audit and corporate governance reform.
Sky News has learnt that the consultation document, which will be published on Thursday, will propose a further review that could make it mandatory for all listed companies to incorporate ‘malus and clawback’ arrangements in directors’ pay arrangements.
The move, if implemented, would represent a significant strengthening of the current regime covering executive remuneration.
Under the proposals, companies would be expected to recover bonuses or share awards already paid – clawback – or cancel outstanding awards – malus – in circumstances including where directors can be demonstrated to have failed to protect customers’ and employees’ interests.
According to a senior audit firm executive, the provisions would also be triggered in circumstances such as a material misstatement of a company’s accounts, and would last for at least two years after an award is made.
The revised arrangements would be implemented by strengthening the UK’s Corporate Governance Code following a consultation led by regulators, with consideration subsequently given to extending their remit by amending listing rules.
Malus and clawback provisions became embedded within bank pay structures since the immediate aftermath of the 2008 financial crisis.
While many companies outside the banking sector have also adopted similar measures since then, few of them are triggered by risk management failures or issues which cause damage to a company’s reputation.
Kwasi Kwarteng, the business secretary, will publish the white paper – called Restoring trust in audit and corporate governance – after weeks of talks in Whitehall.
The source, who said he been briefed on the document’s contents, said on Wednesday that it would also propose a statutory levy to fund the new Audit, Reporting and Governance Authority (ARGA), which is being set up to replace the discredited Financial Reporting Council (FRC).
That would replace the partly-voluntary arrangements which provide the FRC’s annual budget.
Central to the government’s proposals will be a new regime to make directors personally liable for the accuracy of their company’s financial statements, with fines and bans as punishments for breaches of the rules.
The plans, which were reported by the Financial Times in January, triggered by a fierce backlash from parts of the business community, but are not expected to have been changed since then.
Mr Kwarteng will also confirm that the big four auditors – Deloitte, EY, KPMG and PricewaterhouseCoopers – will be required to ‘operationally separate’ their audit and consulting businesses in an attempt to minimise conflicts of interest.
The white paper has been drawn up on the back of public and political anger over prominent audit failures at companies such as BHS, Carillion and the owner of Patisserie Valerie.
Another executive at a big four firm said the document ran to more than 230 pages and would represent the most fundamental shake-up of UK corporate auditing in its history.
The Department for Business, Energy and Industrial Strategy has been contacted for comment.