The Government has published a Green Paper setting out its proposals for corporate governance reform. Against a background of public discontent, due to things like the collapse of BHS and the exposure of poor working practices at Sports Direct, the Green Paper considers possible changes to the corporate governance regime to ensure the UK economy works for everyone.
Corporate solicitor Lisa Faragher and Corporate partner Sophie Brookes explain more:
The Green Paper concentrates on three main areas where the Government believes reform will improve the current framework:
The perceived disconnect between executive pay and that of ordinary employees has become an area of controversy and public concern. Although the Government is keen to retain flexibility for companies to decide their own remuneration packages, the Green Paper asks whether changes are needed to ensure that businesses are listening shareholders’ concerns.
The Green Paper sets out a range of options aimed at achieving executive pay which is transparent, long term, fair and related to performance. Five key areas are considered:
- Shareholder voting and other rights – should executive pay be subject to a binding vote? Should the company set an upper limit for total annual pay?
- Shareholder engagement on pay – what can be done to encourage shareholders to vote down unjustified pay awards? Would establishing a senior shareholder committee help?
- The role of the remuneration committee – is the committee sufficiently visible and pro-active in consulting with shareholders and the workforce? Should it be required to consult before preparing the pay policy?
- Transparency in executive pay – what additional information could companies provide, for example a ratio comparing CEO pay to the pay of the wider company workforce? Would more information about bonus performance targets be useful?
- Long-term executive pay incentives – would restricted share awards better align executives’ interests with long-term performance? Should there be a minimum holding period of five years for options?
Employee and customer voice
There is a concern that companies are not doing enough to reassure the public that they are run for the benefit of all their stakeholders, not just the board and the shareholders.
Directors of all UK companies already have a duty to promote the success of their company for the benefit of its shareholders as a whole, whilst considering the interests of other stakeholders such as employees, suppliers and customers. But could companies do more to strengthen the voice of employees and wider stakeholders at board level? The Green Paper makes four suggestions:
- creating stakeholder advisory panels so the board can hear directly from key stakeholders;
- designating existing non-executive directors to represent key interested groups at board level;
- appointing individual stakeholder representatives to company boards, although this could lead to greater conflict and delayed decision-making; and
- strengthening reporting requirements to provide greater confidence in board decisions.
Businesses will be relieved to hear that the Government is not pushing ahead with its controversial proposal for mandatory employee and customer representatives on boards.
Corporate governance in large private businesses
The Green Paper recognises that, although the UK’s strongest corporate governance and reporting standards focus on public companies, the consequences of a large privately owned company failing can be equally as bad for its stakeholders.
So the Government wants to explore whether large privately-held businesses should meet higher minimum corporate governance and reporting standards. Possible options include extending the voluntary “comply or explain” approach currently applied to listed companies, or developing a bespoke code for unlisted companies.
The deadline for responding to the Green Paper is 17 February 2017. All businesses who could be affected should contribute to the discussion to help ensure that any reforms will work for them in practice.
For more information, please contact:
Corporate partner Sophie Brookes
T: 0161 836 7823