The political imperative to improve the level of public trust in businesses has finally led to concrete proposals for reform. The Government is proposing changes improve transparency on executive pay, strengthen the voice of employees, customers and suppliers at board level and create increase transparency for large privately owned businesses. The reforms are intended to take effect for company reporting years commencing on or after June 2018.
The proposed changes will result in new legislation that will require quoted companies to:
- Report annually on the ratio of CEO pay to the average pay of their UK workforce, explaining year-to-year changes in context across the wider workforce
- In remuneration policies section of the report they will have to clearly explain the range of potential outcomes from complex share-based incentive schemes.
The Financial Reporting Council (FRC) has also been asked to revise the UK Corporate Governance Code to:
- Be more specific about the steps that premium listed companies should take when there is significant shareholder opposition to executive pay policies and awards
- Give remuneration committees a wider responsibility for overseeing pay and incentives (eg requiring them to explain executive remuneration policy to the wider workforce)
- Extend the recommended minimum vesting and post-vesting holding period for executive share awards from three to five years.
In addition, the Investment Association has been asked to create a public register of listed companies encountering significant shareholder opposition (20% or more) to executive pay awards (and how the companies are addressing shareholder concerns).
Strengthening the employee, customer and supplier voice
New legislation will require companies (both private and public) to explain how their directors, when promoting the interests of the company, “have regard” to employee and other stakeholders’ (as set out in s172 of the Companies Act 2006). Although subject to consultation, the Government suggests that this should apply to companies with 1,000 or more employees ie companies that apply the UK Corporate Governance Code and some large private companies.
The new rules are expected to require companies to describe the employee involvement processes that companies use (rather than require specific examples of “having regard” when major decisions have been taken) and for this to be published through the annual report or on the company website.
The FRC is to develop a new principle for the UK Corporate Governance Code establishing the importance of board-level consideration of the views of employees and other non-shareholder interests. This may include a “comply or explain” requirement for companies using one of three employee engagement mechanisms:
- A designated non-executive director
- A formal employee advisory council, or
- A director from the workforce.
Practical guidance is expected to be provided by the GC100 group of the largest listed companies (FTSE100 General Counsels), ICSA (the Institute of Chartered Secretaries and Administrators: The Governance Institute) and the Investment Association.
Corporate governance in large privately-held businesses
The Government intends all companies with more than 2,000 employees (that are not subject to an existing corporate governance reporting requirement) will disclose their corporate governance arrangements in their directors’ report and on their website. A similar requirement may be extended to Limited Liability Partnerships of equivalent scale.
The Government will also ask the FRC (and other bodies) to jointly develop a voluntary set of corporate governance principles for large private companies.
You can read the Government’s proposals here. The FRC intends to consult on amendments to the Code in late autumn 2017 and the Government will publish draft legislation by March 2018.
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