Government consultation on corporate governance reform

13 December 2016

The Department for Business, Energy and Industrial Strategy (BEIS) has issued a green paper consulting on measures to strengthen corporate governance.

The paper sets out a range of options to address concerns in three areas.

  • Levels of executive pay. The paper notes that in 1998 the ratio of average FTSE 100 CEO pay to the average pay of full-time employees in the UK was 47:1. This ratio increased to 132:1 in 2010 and stood at 128:1 in 2015.
  • Increasing representation of workers, customers, suppliers and investors in the boardroom. However, as the Prime Minister has made clear, the paper is not proposing to mandate the direct appointment of employees or other interested parties to company boards.
  • Whether the largest UK private businesses should meet higher corporate governance and reporting standards.

Responses are due by 17 February 2017.

The Green Paper notes that the Government does not have preferred options at this stage. The responses to the Green Paper will help to produce a better understanding of the strengths and weaknesses of the different options and build a better evidence base before the Government decides which of them to develop further. The questions raised in the Green Paper include:

Levels of executive pay in quoted companies

  • Do shareholders need stronger powers to improve their ability to hold companies to account on executive pay and performance?
  • Does more need to be done to encourage institutional and retail investors to make full use of their existing and any new voting powers on pay?
  • Do steps need to be taken to improve the effectiveness of remuneration committees, and their advisers, in particular to encourage them to engage more effectively with shareholder and employee views before developing pay policies?
  • Should a new pay ratio reporting requirement be introduced? If so, what form of reporting would be most useful?
  • Should the existing, qualified requirements to disclose the performance targets that trigger annual bonus payments be strengthened? How could this be done without compromising commercial confidentiality?
  • How could long-term incentive plans be better aligned with the long-term interests of quoted companies and shareholders? Should holding periods be increased from a minimum of three to a minimum of five years for share options awarded to executives?

Strengthening the employee, customer and wider stakeholder voice

  • How can the way in which the interests of employees, customers and wider stakeholders are taken into account at board level in large UK companies be strengthened?
  • Which type of company do you think should be the focus for any steps to strengthen the stakeholder voice? Should there be an employee number or other size threshold?
  • How should reform be taken forward? Should a legislative, code-based or voluntary approach be used to drive change?

Corporate governance in large privately-held businesses

  • What is your view of the case for strengthening the corporate governance framework for the UK’s largest, privately-held businesses? What do you see as the benefits for doing so? What are the risks to be considered?
  • If you think that the corporate governance framework should be strengthened for the largest privately-held businesses, which businesses should be in scope? Where should any size threshold be set?
  • If you think that strengthening is needed, how should this be achieved? Should legislation be used or would a voluntary approach be preferable?
  • Should non-financial reporting requirements in the future be applied on the basis of a size threshold rather than based on the legal form of a business?
  • Is the current corporate governance framework in the UK providing the right combination of high standards and low burdens?

For more information on corporate governance issues please contact Scott Knight.

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