The Department for Business, Energy and Industrial strategy (BEIS) has published a green paper on corporate governance reform with the aim of considering what changes might be appropriate for the corporate governance regime in the UK. The green paper focuses on three specific areas: executive pay, strengthening stakeholder voice and corporate governance in large privately-held businesses.
The government's green paper on corporate governance reform starts from the position that executive pay in the FTSE 100 has risen significantly faster than average pay in the UK and not in line with FTSE performance. The government is suggesting various areas where changes could be made to the executive pay framework:
- Making some or all elements of the executive pay package subject to a binding shareholder vote, either annually, or where there has been significant shareholder opposition to a directors' remuneration report;
- Introducing stronger consequences for losing the annual advisory vote on pay (such as a "supermajority" support test for the company's pay policy in the next binding vote);
- Requiring companies to set an upper limit for executive pay with a binding vote needed if that threshold is exceeded;
- Increasing the frequency of the binding vote on pay (perhaps annually as opposed to every three years);
- Encouraging shareholder engagement on pay – options include strengthening parts of the Corporate Governance Code for listed companies; mandatory disclosure of fund managers' voting records; establishing a "shareholder" committee to engage with the company; and encouraging individual investors to exercise their voting rights;
- Adjusting the role of the remuneration committee, for example by introducing a requirement to consult with shareholders and the company's employees before preparing the pay policy and requiring directors to serve for at least 12 months on the committee before taking the role of chair;
- Improving transparency, including reporting the ratio of CEO to workforce pay and possibly a comparison between CEO/senior executive pay and that of the next tier of management, as well as greater visibility around bonus targets;
- Replacing long term incentive payment awards with restricted share awards, or increasing the holding period for share options to a minimum of five years.
Strengthening the employee, customer and wider stakeholder voice
The government is also considering various ways in which companies could strengthen the voice of employees, customers and other interested parties at board level, either by a change to the Corporate Governance Code or using a voluntary industry-led approach. Suggestions here include:
- Establishing stakeholder advisory panels, to be consulted on specific matters (such as executive pay) or on board matters as they arise.
- Designating a non-executive director to ensure that the views of interested groups (employees in particular) are heard at board level.
- Appointing individual stakeholder representatives to company boards – the green paper confirms that, contrary to a similar idea put forward by Theresa May shortly before she became Prime Minister, this option will not be mandated by the government.
- Stronger directors' reporting requirements – to increase confidence that they are carrying out their duty to act in the best interests of the company in a way that is for the benefit of its members as a whole, including employees and customers.
Corporate governance in large privately-held businesses
The strongest corporate governance and reporting standards in the UK are focused on public companies where the owners or shareholders are distant from the executives running the company. Large private companies and limited liability partnerships are not expected or required to meet the same formal corporate governance and reporting standards as publicly listed companies. The rationale for this is because of the different ownership structure as ownership and control are more closely intertwined. Given that the outcome for stakeholders can be equally as bad if a large privately-held company fails the government is asking whether corporate governance and reporting standards should be extended to cover large private companies and/or Limited Liability Partnerships. The suggestion is that this could be done either by extending the Corporate Governance Code to large privately-held businesses, or developing a separate governance code.
Responses to the green paper are invited by 17 February 2017. Meanwhile the BEIS Parliamentary Committee will report at some stage on its wide-ranging inquiry into corporate governance, covering many of the same areas.