Corporate governance code to cover pay ratios and employees’ voices

The government has set out a package of corporate governance reforms which will see listed companies required to publish pay ratios between chief executives and their average UK workers for the first time as part of plans to enhance boardroom accountability through wider reporting

The proposals are included in the response from the Department for Business, Energy and Industrial Strategy (BEIS) to the consultation on ways to strengthen the UK’s corporate governance framework which closed on 17 February.

BEIS says it plans to introduce legislation to require quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce, along with a narrative explaining changes to that ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce. Companies will also need to provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.

In the autumn, the Investment Association will be asked to set up and oversee a public register of listed companies where 20% or more of shareholders have objected to executive annual pay packages, along with a record of what these companies say they are doing to address shareholder concerns.

The government says it will also take forward its manifesto commitment to commission an examination of the use of share buybacks to ensure that they cannot be used artificially to hit performance targets and inflate executive pay. The review will also consider concerns that share buybacks may be crowding out the allocation of surplus capital to productive investment. More details will be announced shortly.

In addition, BEIS intends to invite the Financial Reporting Council (FRC) to revise the UK corporate governance code 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).

It also wants the code to give remuneration committees a broader responsibility for overseeing pay and incentives across their company and require them to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy.

BEIS suggests the FRC should extend the recommended minimum vesting and post-vesting holding period for executive share awards from three to five years to encourage companies to focus on longer-term outcomes in setting pay.

Section 172

BEIS is recommending improved reporting under Section 172 of the Companies Act 2006 and plans to introduce legislation to require all companies of significant size (private as well as public) to explain how their directors comply with the requirements of section 172 to have regard to employee and other interests.

The FRC is to consult on the development of a new code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level. The government suggests this should include 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.

Finally, BEIS is proposing the FRC should work with the IoD, the CBI, the Institute for Family Businesses, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for large private companies, under the chairmanship of a business figure with relevant experience.

The government will introduce legislation to require companies of a significant size to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code. This requirement will apply to all companies of a significant size unless they are subject to an existing corporate governance reporting requirement. It is considering whether to extend a similar requirement to limited liability partnerships (LLPs) of equivalent scale.

The FRC intends to consult on amendments to the UK corporate governance code in the late autumn. The government intends to lay before Parliament draft secondary legislation, where required, before March 2018. The work on developing voluntary corporate governance principles for large private companies will commence in the autumn. BEIS said the current intention is to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.

Business Secretary Greg Clark said: ‘One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business. Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world.

‘We have maintained such a reputation by keeping our corporate governance framework under review. Today’s reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.’

Speaking on the announcement, Stephen Haddrill, CEO, FRC, said: ‘The UK’s deserved reputation for good corporate governance, earned over the last 25 years, has underpinned British business success. How we develop the framework will be key to boosting competiveness, transparency and integrity in business particularly after Brexit.

‘The FRC is undertaking a fundamental review of the corporate governance code. The government’s feedback will help inform the development our consultation later this year.

‘Large private companies are integral to the UK economy as significant employers and supporters of communities and families. It is right that we develop a set of corporate governance principles to enhance confidence that they act in the public interest.’

Corporate governance reform:  The government response to the green paper consultation is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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