The government's package of corporate governance reforms has been announced.
To a flurry of media and opposition accusations of back-tracking and watering-down, the government has published its plans for corporate governance reform. Describing its proposals as "world-leading", the government has announced reforms in each of the three key areas covered by its 2016 green paper on corporate governance reform:
- Executive pay.
- Employee and wider stakeholder voice.
- Large privately-held businesses.
Many of the government's reforms involve suggested amendments to the UK Corporate Governance Code (the Code). The Code is the remit of the Financial Reporting Council (FRC) and the government's proposals will form part of the "fundamental review" of the Code that the FRC has announced it will carry out later this year. It will be for the FRC, in consultation with companies, investors and other stakeholders, to decide how the government's proposals for amendments to the Code are reflected.
The government's key proposals for reform are set out below.
Quoted companies will be required to report the ratio of CEO pay to the average pay of their UK workforce annually, along with an explanation of the changes to that ratio from year to year and how it relates to pay and conditions across the wider workforce. The ratio in the compulsory reporting requirement will relate to the UK workforce only – multinationals will be "free to" publish a broader global ratio alongside the UK one.
- Proposals for an annual binding vote on pay are not being taken forward.
- The Code to set out the steps that a company should take when it encounters significant shareholder opposition to executive pay. Examples given by the government for how this may be implemented include, provisions requiring a company to publicly respond to dissent within a specified time period, or putting the remuneration policy to shareholder vote at the next AGM.
- Introduction of a public register for listed companies where shareholder opposition to executive pay (and other resolutions) is 20% or more, together with a record of what the company is doing to address concerns. The government will ask the Investment Association to implement this register of dissent.
- The Code to give remuneration committees greater responsibility for showing alignment of pay and incentives across the company, and for explaining how decisions on executive pay reflect wider pay policy.
- The Code to include a new provision that the chair of the remuneration committee has served for at least 12 months.
- Remuneration policies to contain clearer explanations of the range of potential outcomes from complex, share-based incentives schemes.
- The Code to increase the minimum holding period for share-based remuneration from three years to five years.
Employee and wider stakeholder voice
Proposals for compulsory worker representation on boards were dropped by the government some time ago. The government has now proposed a Code requirement for premium listed companies to adopt, on a "comply or explain" basis, one of three employee engagement mechanisms:
- a designated non-executive director
- a formal employee advisory council
- a director from workforce.
This is to be supported by a new general Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level.
All companies of a significant size (1000 employee threshold suggested but this will be considered further) will be subject to a formal reporting requirement to explain how their directors comply with the obligation (under section 172 Companies Act 2006) to have regard to employee interests and to fostering relationships with suppliers, customers and others.
The government will further consider how this will operate but suggests that companies will be required to explain how they have identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information has influenced boardroom decision-making. Disclosures may also need to be made on the company website as well as in the annual report.
- Practical guidance on ways in which companies can engage with their employees and other stakeholders at board level to be published by The Institute of Chartered Secretaries and Administrators and the Investment Association.
- Practical guidance for the boardroom on the duties under section 172 to be published by the GC100 group.
Large privately-held businesses
- A voluntary set of corporate governance principles will be developed for large private companies. The FRC will work in conjunction with other relevant bodies to develop these.
- All companies, including private companies, of a significant size (2000 employee threshold suggested but this will be considered further) will be required to disclose their corporate governance arrangements in their directors' report and on their website, including whether they follow any formal code of governance. The government will also consider extending this reporting requirement to limited liability partnerships of equivalent size.
- The formal reporting obligation in relation to section 172 (see Employee and wider stakeholder voice above) will also apply to private companies of a significant size.
Implementation of the government's proposals will involve some secondary legislation and the cooperation and action of others, primarily the FRC. The government currently intends for the reforms to be in effect by June 2018 (to apply to company reporting years commencing after that date).