The UK government announced a set of corporate governance reforms that it says will enhance the transparency of businesses to shareholders, employees, and the public. The government intends to bring the reforms into effect by June 2018.
The move to improve accountability and boost the public’s trust in business comes as high-profile cases of corporate mismanagement have contributed to a decline in the British public’s trust in business in recent years.
The reforms centre on making executive pay more transparent and giving employees a voice in the running of the company. In addition, the Corporate Governance Code, which currently applies to listed companies only, will be revised to cover large privately held companies on a voluntary basis.
The measures are later than expected and less radical than those proposed by Prime Minister Theresa May last year. This delay and dilution of measures could be attributed in part to political factors. Shortly after the consultation period ended, a general election was announced, and in that election, the government’s majority in Parliament was reduced, making any changes to legislation (which require an act of Parliament) harder to achieve. Civil servants’ and politicians’ time alike is also being consumed by the Brexit process.
Among the key measures announced:
Pay ratios. Listed companies would be required to disclose, and justify, the pay ratio between the chief executive and the average UK worker each year.
According to a study by the Equality Trust, on average, the CEOs of FTSE 100 companies take home about 190 times what the average UK employee earns. Surveys conducted by the Institute of Business Ethics (IBE) show that the high level of executive pay is one of the major factors undermining public trust in business.
The disclosure requirement aims to shine a spotlight on how profits are shared from the business. In the US, a similar requirement was approved by the US Securities and Exchange Commission in 2015. Public companies must include pay-ratio disclosure in annual statements from 2018. However, the section of the Dodd-Frank Act that prompted the SEC to require the disclosure could be repealed if pending legislation is passed by the US Senate.
Useful comparisons can only be made within a particular sector. A retailer with a large number of staff on minimum wage, for example, would have a higher ratio than an investment bank where the majority of workers are highly qualified.
Shareholder opposition to executive pay deals. Details of those listed companies facing objections to executive pay packages from 20% or more of their shareholders would be published on a register to be launched later this year. This would be overseen by the Investment Association.
Although this information is already in the public domain, Philippa Foster Back, director of the IBE, noted that fundamental reform of executive pay was needed. “The government will have done everybody a service if the requirement to publish pay ratios prompts a thorough rethink of how the whole process works,” Foster Back added.
Employee voice. The Business Secretary would ask the Financial Reporting Council (FRC) to introduce a new requirement into the UK Corporate Governance Code that would seek to ensure employees’ interests are better represented at the board level of listed companies.
Companies could choose to assign a non-executive director to represent employees, create an employee advisory council, or nominate a director from the workforce. All companies of a significant size would be obliged to report on how directors have taken employees’ and shareholders’ interests into account.
“All directors are responsible for the whole company, so any with the specific remit to speak for employees must be adequately trained and aware of their responsibility to promote the long-term success of the business,”Stephen Martin, director general of the Institute of Directors, said in a news release.
The FRC is undertaking a review of the Corporate Governance Code and will launch a consultation later this year. It intends to publish a revised code by the middle of 2018. This would be extended to cover large private companies on a voluntary basis and would apply from 2019.
The IBE’s Foster Back welcomed the plan to extend greater governance discipline to unlisted companies.
“The starting point should be a recognition that all company directors, not just those of listed companies, are subject to the legal duty set out in the law whereby boards must take stakeholder and ethical issues into account when making strategic decisions,” she said.