BEIS has published the Government's response to its Green Paper on corporate governance. A number of areas for reform have been identified although some of the more controversial proposals (such as annual binding shareholder votes on executive pay) have been dropped.
The Investment Association will be invited to implement its proposal to maintain a new public register of listed companies where 20% or more of its shareholders have objected to executive pay awards. The aim is for the public register to be set up in autumn 2017.
Listed companies will be required to report the pay ratio between their chief executive and average UK worker on an annual basis. An explanation of any changes to that pay ratio from year to year and how the ratio relates to pay and conditions across the wider workforce will also be required. These requirements will be introduced via secondary legislation and are expected to affect around 900 listed companies. Clearer explanations around the use of complex, share-based incentive schemes will also be required.
The Financial Reporting Council (FRC) will be invited to consult on changes to the UK Corporate Governance Code around the steps that companies should take when they encounter significant shareholder opposition to executive pay. The FRC will also consult on other changes to the UK Corporate Governance Code and its supporting guidance including the role and responsibilities of remuneration committees and guidance on share-based remuneration.
The Government has confirmed its plan to review the use of share buybacks as a means of artificially hitting performance targets and inflating executive pay. Further details will be announced shortly.
Strengthening the employee, customer and wider stakeholder voice
The FRC has been asked to consider and consult upon a requirement that premium listed companies adopt one of three employee engagement mechanisms on a "comply or explain" basis:
- nominating a non-executive director to represent employees
- creating a formal employee advisory council
- nominating a director from the workforce.
ICSA and the Investment Association will be invited to produce guidance on the practical ways companies can engage with their employees and other stakeholders.
Secondary legislation will be introduced to require all companies of a significant size (private as well as public) to explain how their directors comply with the requirements of section 172 of the Companies Act 2006. Section 172 requires companies to consider the interests of other stakeholders (such as employees, suppliers and customers) in their decision making process. GC100 will be invited to publish new guidance on the practical interpretation of directors' duties under section 172.
Corporate governance in large privately-held companies
The Government plans to commission the FRC to work with various industry bodies to develop a voluntary set of corporate governance principles for large private companies under the chairmanship of a business figure with relevant experience. Work on this initiative is expected to begin in autumn 2017.
Secondary legislation will be introduced to require all companies above a certain size to disclose their corporate governance arrangements in the directors' report and on their website. The Government will also consider whether a similar requirement should be extended to limited liability partnerships.
The initial proposal is that this requirement should apply to companies with more than 2,000 employees, unless they are already subject to an existing corporate governance reporting requirement.
The FRC intends to consult on amendments to the UK Corporate Governance Code in the autumn of this year.
Secondary legislation in respect of the other measures is expected to be introduced by March 2018.
The aim is to introduce the changes by June 2018 to apply to company reporting years commencing on or after that date.