Last Autumn the Business, Energy and Industrial Strategy Parliamentary Committee started an inquiry into corporate governance. The Committee's report, published on 5 April, considers whether the UK corporate governance framework is fit for purpose, whether it provides the right structures to assist businesses in making high quality decisions for the long term (taking the wider interests of society fully into account) and how good behaviour can be embedded in business through cultural change and persuasion.
The Committee recognises the strength of corporate governance in the UK but also notes the erosion of public trust in business and the "dramatic ratcheting up" of executive pay in recent years. It concludes that, although a radical overhaul of the current framework is not necessary, there is scope for significant improvements and makes a number of recommendations, including some of particular relevance to employers:
• the structure of executive pay should be simplified. Long-term incentive plans should be phased out as soon as possible and the Financial Reporting Council (FRC) should consult with stakeholders with a view to amending the UK Corporate Governance Code to establish deferred stock rather than LTIPs as best practice in incentivising long-term decision making
• the Code should be amended to include a requirement for a binding vote on executive pay the following year if there is a 25%+ vote against
• the Chair of the Remuneration Committee should be expected to resign if proposals do not receive the backing of 75% of voting shareholders.
Composition of boards:
• the Government should set a target that, from May 2020, at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women. An explanation for any failure to meet this target should be included in the annual report
• the Code should be amended so that all references to gender are extended to cover ethnicity as well
• the Government should legislate to ensure that all FTSE 100 companies publish workforce data broken down by ethnicity and pay band
• the Committee decided not to recommend a compulsory requirement for workers on boards, but suggested it is something which should be encouraged.
• the Code should be amended to require informative narrative reporting on the fulfilment of directors' duties, including a requirement for boards to explain precisely how they have considered each of the different stakeholder interests and how this has been reflected in financial decisions
• the FRC should be given additional powers to engage and hold to account company directors in respect of the full range of their duties.