One of the UK’s biggest assets in competing in the global economy is its reputation for being a dependable and confident place in which to do business. This has been maintained by keeping the corporate governance framework up to date.
The Government published the Green Paper on corporate governance reform last November. It focused on three specific aspects of corporate governance where the Government saw particular scope to strengthen the current framework—executive pay, corporate governance in large privately held businesses, and the steps that company boards take to engage and listen to employees, suppliers and other groups with an interest in corporate performance.
The Green Paper attracted 375 responses from a wide cross-section of business and society and have provided Government with a solid basis on which to take decisions. It has also benefited from the work of the Business, Energy and Industrial Strategy Committee which published recommendations for corporate governance reform in April.
Three key themes emerged from responses to the consultation.
First, in relation to executive pay, there were widely held concerns that a small minority of companies are not responding adequately when they encounter significant shareholder opposition to levels of executive pay and that remuneration committees need to do more to demonstrate that they are sensitive to pay and conditions across the wider workforce.
Second, a widely held view that large companies could do more to strengthen the employee, customer, supplier and wider stakeholder voice at boardroom level as a key factor in improving boardroom decision-making, delivering more sustainable business performance and building wider public confidence in the way businesses are run.
Third, there was a widely held view that there should be more transparency and accountability for corporate governance in large privately held businesses, reflecting their economic and social significance.
The Government have now published their response to the consultation setting out the proposals that they now intend to take forward to address these and other corporate governance issues. They involve a combination of secondary legislation, enhancements to the UK corporate governance code (which is overseen by the Financial Reporting Council) and voluntary, business-led action.
The Government intend to introduce secondary legislation to:
Require quoted companies to report annually the ratio of chief executive total remuneration to the average pay of the company’s UK employees, and to set out more clearly in remuneration policies the impact of share price growth on long-term executive pay outcomes;
Require all companies of significant size to explain how their directors comply with their requirements under Section 172 of the Companies Act 2006 to have regard to employee and other interests;
Require the UK’s largest companies, including privately-held businesses, to disclose their corporate governance arrangements, including whether they follow any formal code, except where they are already subject to an equivalent reporting requirement.
The Government have also invited the Financial Reporting Council (FRC), as part of their consultation on a revised UK corporate governance code later this year, to consider a number of new provisions including:
Giving company remuneration committees a broader responsibility for overseeing pay and incentives across the company and explaining how these relate to executive pay incentives;
Requiring companies to be more specific about the steps they should take to address significant shareholder dissent on executive pay (and other matters);
Requiring companies, on a comply or explain basis, to adopt one of three employee engagement mechanisms: a designated non-executive director, an employee advisory council or a director from the workforce.
The Government have asked business and professional bodies to take forward related business-led initiatives, including:
Inviting the CBI, the Institute of Directors, the British Venture Capital Association and the Institute of Family Businesses to work with the FRC to develop a voluntary set of corporate governance principles for large, privately held businesses; and
Asking the Investment Association to implement its proposal to establish and maintain a public register of companies receiving significant shareholder votes against resolutions, including on executive pay.
In addition, the Government have asked the FRC, the Financial Conduct Authority and the Insolvency Service to conclude new or, in some cases, revised letters of understanding with each other before the end of this year to ensure the most effective use of their existing powers to sanction directors and ensure the integrity of corporate governance reporting. The Government will consider, in the light of this work, whether further action is required.
Implementation of these measures will improve shareholder scrutiny of executive remuneration, strengthen the employee voice in board-rooms and build confidence in the way companies, both listed and privates are run. They will build on the UK’s corporate governance strengths and help ensure that we are equipped for the economic opportunities and challenges that lie ahead.
The Government’s full response to the Green Paper consultation is available on the gov.uk website and copies have been placed in the Library of the House.