The government has published a number of headline proposals for the reform of the corporate governance of publicly-traded companies and large privately-held companies. These cover three aspects of corporate governance on which the government had previously consulted: executive pay; strengthening the employee, customer and supplier voice; and corporate governance in large privately-held businesses.
There are three main government proposals:
- Introducing secondary legislation to require quoted companies to:
- report annually on the ratio of CEO pay to the average pay of their UK workforce; and
- provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.
- Inviting the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code (the Code), which applies to premium listed companies, to:
- be more specific about the steps that premium listed companies should take when they encounter significant shareholder opposition to executive pay policies and awards (and other matters);
- give remuneration committees a broader responsibility for overseeing pay and incentives across their company; and
- extend the recommended minimum vesting and post-vesting holding period for executive share awards from three to five years.
- Inviting the Investment Association to maintain a public register of listed companies encountering shareholder opposition to pay awards of 20 per cent or more, along with a record of what these companies say they are doing to address shareholder concerns.
Strengthening the employee, customer and wider stakeholder voice
Here there are also three main government proposals:
- Introducing secondary legislation to require all companies, private and public, of significant size (over 2,000 employees) to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to employee and other interests.
- Inviting the FRC to consult on the development of a new Code principle which establishes, as an important component of running a sustainable business, the importance of strengthening at board level the voice of employees and other non-shareholder interests. This will include inviting the FRC to consult on a specific Code provision requiring 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; or a director from the workforce.
- Encouraging industry-led solutions by:
- asking the Institute of Chartered Secretaries and Administrators and the Investment Association to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders; and
- inviting the GC100 group of the largest listed companies to complete and publish new advice and guidance on the practical interpretation of the directors' duties in section 172 of the Companies Act 2006.
Corporate governance in large privately-held businesses
There are two main government proposals:
- Introducing secondary legislation to require all companies, private and public, of a significant size (over 2,000 employees) to disclose their corporate governance arrangements in their directors' report and on their website, including whether they follow any formal code.
- Inviting the FRC to work with the Institute of Directors and other industry bodies to develop a voluntary set of corporate governance principles for large private companies.
The government's intention is to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.
These proposals cover a range of companies from premium listed to large privately-held companies. The introduction of mandatory corporate governance reporting requirements for the latter reflects the significant economic and social impact that these companies can have in practice, irrespective of their legal status. So far as listed companies are concerned, the proposals do not go as far as some had thought they might. While publishing the ratio between CEO pay and their employees' pay looks set to become mandatory for these companies, proposals to hold annual binding shareholder votes on executive pay and to require employee representation on boards are not being taken forward.