UK moves to bolster corporate governance

Posted by on 12/09/2017

The UK government has announced a package of reforms around the setting of executive pay, strengthening stakeholders’ voices and improving the governance of large privately-held businesses.

The changes follow the responses it received to a green paper, released in November last year, in which it considered how it could further boost the UK corporate governance regime.

Executive pay

The green paper found that executive pay has risen faster than corporate performance. In addition, a persistent small minority of UK businesses continue to disregard the views of shareholders on pay each year. Added to this, some remuneration committees are not taking their existing obligations seriously enough to take account of wider workforce pay and conditions in setting executive remuneration. Concerns were also expressed about the unnecessary complexity and uncertainty of executive pay, particularly around the potential outcomes of long-term incentive plans.

As a result, the UK government will ask 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
  • give remuneration committees a broader responsibility for overseeing pay and incentives across their companies and require them to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy (using pay ratios to help explain the approach where appropriate)
  • 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.

The UK government will also introduce legislation to require listed companies to:

  • report annually the ratio of CEO pay to the average pay of their UK workforce and provide a narrative explaining changes to that ratio from year to year — they will also have to set the ratio in the context of pay and conditions across the wider workforce.
  • provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.

In addition, the Investment Association will be asked 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 stakeholders’ voices

The green paper consultation picked up on a strong need for action to strengthen the stakeholder voice. Many respondents thought big business should do more to reassure the public that companies are being run, not only in the interests of the board and shareholders, but with a recognition that they have responsibilities to employees, suppliers, customers and wider society.

Section 172 of the UK Companies Act 2006 already requires company directors to have regard to these wider interests, but a large number of respondents thought this aspect of the legal framework could be made to work more effectively through improved reporting, code changes, raising awareness and more guidance.

As a result, the UK government will introduce legislation to require all companies of significant size (both private and public) to explain how their directors comply with the requirements of Section 172.

It will also invite the FRC to consult on developing a new code principle that establishes the importance of strengthening the voice of employees and other non-shareholder interests at board level.

And it will encourage industry-led solutions — for example, by asking the UK’s Governance Institute and the Investment Association to complete joint guidance on practical ways in which companies can engage with their employees and other stakeholders.

Large privately-held businesses

The government plans to encourage large private companies to adopt stronger corporate governance arrangements through a voluntary set of corporate governance principles, developed in conjunction with industry bodies and associations.

In addition, 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.

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