The government has recently announced plans to reform a few elements of the UK corporate governance regime. Implementing these proposals will require various changes to the UK Corporate Governance Code, secondary legislation and the action of the Financial Reporting Council (FRC) in consultation with companies and investors to implement such amendments. If the Government’s proposals are approved, new regulations are scheduled to come into force in June 2018 for financial years starting after that date.
We have summarised the key proposals.
FTSE100 CEO total pay has increased from an average £1m in 1998 to over £4m today! Persisting concerns have been highlighted among investors over excessive levels of executive remuneration at UK quoted companies.
Quoted companies will be required to report annually in their remuneration report the ratio of CEO pay to the average pay of their UK workforce and provide an explanation of the changes to that ratio year by year.
The Corporate Governance Code will set out the steps that should be taken upon significant (ranging from 10% to 35%) shareholder opposition to executive pay. It is proposed that a public register of listed companies encountering shareholder opposition of 20% or more to executive pay will be introduced along with a record of what these companies say they are doing to address such concerns.
It’s also envisaged that the normal holding period for share-based remuneration should be at least five years rather than the three-year minimum set out currently in the UK Corporate Governance Code.
Strengthening the employee and wider stakeholder voice
Many companies already have mechanisms in place ensuring that employee and other stakeholder views are taken into account in boardroom decision-making. Directors are expected to have regard to employee interests and to fostering relationships with suppliers and customers in connection with their duty to promote the success of the company.
According to Government proposals both private and public companies of a significant size will need to explain how they have involved the key stakeholders and employees in the decision making of the board. It is yet uncertain how this will be implemented and work in practice. Disclosures may need to be made on the company’s website and in its annual report. The Institute of Chartered Secretaries and Administrators and the Investment Association are already developing practical guidance on such boardroom engagement. The Government has also asked the GC100 group of the largest listed companies to prepare and publish new advice and guidance on the practical interpretation of directors’ duty in relation to employees and stakeholders.
The Government will invite the FRC to consult on a new Corporate Governance Code provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of the following three “employee engagement mechanisms”: designating a non-executive director to represent employees, establishing a formal employee advisory council, or appointing a director from the workforce.
Large privately held businesses
The corporate governance framework is expected to be strengthened for large privately held businesses with a view to reassuring and demonstrating to the public that they are well run. A set of corporate government principles will be developed, the application of which will be voluntary. Companies will be allowed to continue using their own preferred approaches and industry developed guidance, such as those developed by the British Private Equity Association, if these are considered more appropriate.
Currently only companies listed on the London Stock Exchange are subject to corporate governance reporting requirements. This will be broadened to all UK companies (private ones as well) with over 2,000 employees. The Government will also consider extending a similar requirement to LLPs of equivalent scale. The disclosure must be made in the directors’ report and on the company’s website, so that it’s easily accessible to external stakeholders who are not shareholders.