A recent Report from the Department for Business, Energy and Industrial Strategy Committee contains a raft of proposals aimed at improving general corporate governance within UK companies. So what are the key proposals and how will they impact on UK companies?
Who will be affected?
Rather than reforming UK company law, the Committee is proposing that most of its recommendations are implemented through changes to the UK Corporate Governance Code (the Code). That Code applies to companies with a premium listing on the Main Market of the London Stock Exchange who are expected to follow the Code on a “comply or explain” basis. Other listed companies, such as those on AIM, often follow the Code on a voluntary basis but private companies typically do not comply with the Code as its provisions are less well suited to smaller, owner-managed businesses.
The key proposals
1. Directors’ duties
The Committee recommends improvements to the Code to ensure company directors are taking their duties seriously. This would be achieved through more specific and accurate reporting, supported by tougher enforcement via the Financial Reporting Council (FRC).
In particular, the Code would be amended to require narrative reporting on the section 172 duty (the duty to promote the success of the company), explaining precisely how the directors have considered each stakeholder interest and how this is reflected in the financial decisions made. A requirement for reports to be ‘accessible, narrative and bespoke’ should help to avoid boilerplate statements.
The FRC appears to be aligned with the Committee’s recommendations as they have previously stated that the existing regulatory framework is “fragmented and enforcement is not fully effective at present“. The FRC went on to say that they would be willing to accept “additional responsibility to sanction all directors“, when concerns are raised about financial reporting or corporate integrity. The Government appears to have taken them up on their offer.
The Report acknowledges that action is needed to tackle high and unwarranted executive pay. Accordingly, the Committee:
- supports scrapping long term incentive plans (LTIPs) by 2018 and replacing them with restricted stock awards;
- recommends a binding vote on pay in the year following any company receiving less than 75% support in the advisory vote on its remuneration report and pay policy; and
- recommends that companies should report remuneration levels clearly and consistently and disclose pay ratios between high level and lower level employees.
3. Composition of boards
Continuing efforts to increase gender and ethnic diversity on company boards, the Committee recommends:
- setting a target that from May 2020 at least half of all new appointments to senior positions within FTSE350 companies should be women;
- that FTSE100 companies should be required to publish their workforce data, broken down by ethnicity and pay band; and
- that companies should produce a working narrative highlighting steps taken to ensure board diversity and should publicly state why a particular director has been admitted to the board.
4. Private companies
Historically, the UK’s strongest reporting standards have focussed on public companies. The Committee recognises that the consequences of a privately owned company failing can be equally as bad for its stakeholders.
The Report therefore recommends that a new Corporate Governance Code be introduced for the largest privately-held companies with compliance overseen by a new regulatory body. This new code would be voluntary but should this fail to raise general governance standards after three years a mandatory regime would be introduced.
The FRC has confirmed that it is ready to develop a governance framework for larger private companies. However, they recognise that this will need to be tailored to take into account the “specific and different ownership and governance arrangements” of private companies.
And there’s more…
Alongside the Committee’s inquiry, the Government also published a Green Paper consultation on corporate governance, focusing on executive pay, employee and wider stakeholder voice, and large privately-held businesses – with some degree of overlap with the Committee’s inquiry.
In addition, back in February the FRC announced its own plans for a fundamental review of the current UK Corporate Governance Code. The FRC has already confirmed that “the depth and breadth of the [Committee’s] recommendations, if fully adopted, will have significant implications for the FRC’s remit, resources and funding“.
It seems likely that those hoping for only minor changes to the corporate governance regime will be disappointed. Both the Committee and the FRC have made clear that the UK’s existing framework needs to evolve, whilst ensuring that its current strengths are preserved.
This blog post was written by Elliot Gibson. For further information, please contact:
Sophie Brookes, partner, Corporate
T: 0161 836 7823