The Department for Business, Energy and Industrial Strategy Committee (BEIS) has published the government’s response to the consultation on corporate governance reform. Back in May, we published a blog on Talking Business outlining some of the key proposals. The government has now highlighted which of these it intends to take forward.
The response focused on three key areas: (1) executive pay; (2) employee and customer voice; and (3) corporate governance in private businesses.
Levels of executive pay continue to move further away from the pay levels of ordinary members of the workforce. The government has questioned whether executive pay requires further reform to enable companies to show that they are acting on the concerns of shareholders and showing an interest in the wider stakeholder base.
The Financial Reporting Council (FRC) will be invited to:
- revise the UK Corporate Governance Code (the Code) to set out what steps a company should take if it encounters significant shareholder opposition to executive pay; and
- implement a public register of listed companies which have shareholder opposition of 20% or more to executive pay, alongside what steps are being taken to address any concerns.
Companies could be required to respond publicly to shareholder dissent within a certain period of time, or verify that the dissent has been addressed by putting the company’s existing or revised remuneration policy to a shareholder vote at the next annual general meeting.
There is a focus on the need to improve the effectiveness of remuneration committees. The government proposes to:
- give committees greater responsibility for showing how pay and incentives differ throughout the company;
- introduce a requirement that companies explain to the workforce how a decision on executive pay has been reached; and
- introduce a new provision requiring the committee chair to have 12 months’ experience of sitting on a remuneration committee.
Transparency in executive pay
The government had previously highlighted concerns with any requirement to disclose pay ratios as comparing these across different sectors and business models could lead to misleading conclusions.
Despite this, however, there are plans to introduce legislation which would require quoted companies to report annually on the ratio of CEO pay to that of their ordinary workforce. This would also require a narrative explaining the difference and how it relates to pay and conditions throughout the rest of the company.
Employee and customer voice
There is a desire to strengthen the voice of employees, customers and other interested parties at boardroom level. The government proposes to:
- introduce a new principle into the Code which highlights the importance of strengthening the voice of employees and other stakeholders and how this is an important element of a sustainable business; and
- introduce another provision requiring listed companies to adopt one of three employee engagement mechanisms: (1) a designated non-executive director; (2) a formal employee advisory council; or (3) a director from the workforce.
The government also believes that stronger reporting linked to the directors’ duty under section 172 to promote the success of the company for the benefit of its members, whilst taking into account the interests of its stakeholders, would help to reassure investors, creditors and others and would improve visibility of boardroom practice.
The government intends to introduce legislation requiring companies of a certain size to explain how directors have complied with the section 172 duty and how they have considered the interests of employees and wider stakeholders.
The government has acknowledged the need for clearer interpretation of section 172, but there is no desire to tweak the specific wording of the duty.
The government intends to introduce a corporate governance code which will apply to large private companies. The provisions will be voluntary and will allow for the use of other recognised codes and guidance.
Legislation will be introduced which will require all private companies of a certain size to disclose their corporate governance arrangements in their directors’ report and on their website. This will include whether or not any code has been adopted.
Powers of the FRC
The government says that the FRC, FCA and Insolvency Service should come to a clear understanding and reach an agreement as to the most appropriate and effective way to use their powers to encourage and enforce good corporate governance.
The FRC is due to provide its response to these proposals, and consult on revisions to the Code, in autumn 2017. It remains to be seen whether that results in further reforms to the UK’s corporate governance regime.
This post was written by Elliot Gibson. For further information, please contact:
Sophie Brookes, partner, Corporate