Yesterday (29 November 2016), the Department for Business, Energy and Industrial Strategy published its long awaited Green Paper on Corporate Governance Reform.
In the build-up to its publication there was a great deal of speculation about what it might contain. Would the Government adopt a much more interventionist approach to executive pay? Would employees be given a seat on company boards? How would the Government “build an economy that works for everyone, not just the privileged few”?
In reality the Green Paper is short on prescription and long on aspiration. It is apparent that the Government has backtracked a lot on much of its rhetoric over the summer about clamping down on executive pay and putting worker representatives on company boards. That said, there are some interesting ideas about strengthening the corporate framework for large companies and better corporate governance should lead to better accountability and decision-making.
The Green Paper attempts to improve corporate governance by consulting on the following three areas:
- Executive pay
- Strengthening the employee, customer and wider stakeholder voice
- Improving corporate governance in the UK’s largest privately-held businesses
The rest of this blog provides a detailed overview of the proposals.
There is a negative perception that the pay model for executives at FTSE companies is broken, that regardless of corporate or stock market performance, CEO pay continues to go up. The Green Paper invites views on the case for changes to be made to the UK’s executive pay framework for quoted companies in five areas:
- Shareholder voting and other rights. For example, should some or all of the executive pay package be subject to binding vote? Or, should there be a requirement to encourage quoted companies to set an upper threshold for total annual pay?
- Shareholder engagement on pay. A complementary or alternative way to enable greater shareholder engagement on pay might be to establish a senior Shareholder Committee to scrutinise remuneration and other key corporate issues. Alternatively, should individual retail shareholders be encouraged to exercise their rights to vote on pay and other corporate decisions?
- The role of the remuneration committee. Should the remuneration committee consult shareholders and the wider company workforce in advance of preparing its pay policy? Note that this is NOT the same as having worker representation on company boards.
- Transparency in executive pay. Should companies publish ratios comparing CEO pay to pay in the wider company workforce? Interestingly by way of comparison, from January 2017, publication of this ratio will become a requirement for listed companies in the US.
- Long-term executive pay incentives. How should long-term incentive plans be better aligned with the long-term interests of quoted companies and shareholders? Should holding periods for share awards be increased from a minimum of three to a minimum of five years?
Strengthening the employee, customer and wider stakeholder voice
Section 172 of the Companies Act 2006 gives directors a responsibility to create successful businesses for the benefit of shareholders, whilst having regard to a range of other interests. No doubt influenced by events at Sports Direct and BHS, the Government clearly thinks it is important for companies and their boards to properly recognise that they do indeed have wider (societal) responsibilities, rather than just maximising shareholder value. To this end and in an attempt to build confidence that section 172 is properly applied and understood, the Green Paper articulates various options for reform, including:
- Creating stakeholder advisory panels. Company boards could create stakeholder advisory panels for directors to hear directly from their key stakeholders and amplify voices with different backgrounds and perspectives to those more commonly found in the boardroom.
- Designating existing non-executive directors, to ensure that the voices of key interested groups, especially those of employees, are being heard at board level.
- Appointing individual stakeholder representatives to company boards. Note that this is not the same as mandating the direct appointment of employees to company boards.
Improving corporate governance in the UK’s largest privately-held companies
The question posed by the Green Paper is whether and to what extent, large, privately-held businesses should meet higher minimum corporate governance and reporting standards. Options for reform include:
- Applying enhanced standards of corporate governance more widely, perhaps by way of introducing a new corporate governance code just for private companies.
- Applying reporting standards more consistently, perhaps on the basis of a size threshold rather than on the legal form of a business.
I am a big fan of good corporate governance. If properly done, it can form the basis of a more ethical approach to doing business that takes into account the goals and interests of key stakeholders, resulting in more transparent and balanced decision making. The deadline for responses is 17 February 2017.