In November 2016, the government published a Green Paper on Corporate Governance Reform (which I blogged about here). In late August 2017, the government published its response to this Green Paper consultation. Before looking at the proposals in the response document, one point is worth noting. Usually, the government will publish a Green Paper which will contain proposals for consultation, which will then be followed by a White Paper that contains detailed final plans for reform. Here, no White Paper is forthcoming and instead the government has published a ‘response’ document that contains a number of action points, the discusson of which lacks the depth and detail found in a White Paper and, as regards a number of reforms, places the empahasis on several third-party organisations such as the FRC and the Investment Association. The response document itself focuses on five areas, of which three contain substantive proposals for reform, namely:
- executive pay;
- strengthening the employee, customer and wider stakeholder voice, and;
- corporate governance in large privately-held businesses.
The response document sets out the following reforms:
- The government invites the FRC to revise the UK Corporate Governance Code to set out the steps that companies should take when they encounter significant shareholder opposition to executive pay.
- The government invites the Investment Association to maintain a public register of listed companies encountering shareholder opposition of 20% or more to executive pay and other resolutions, along with a record of what these companies are doing to address concerns. The Investment Association has confirmed that this register will be set up by the end of 2017.
- The government invites the FRC to consult on a revision to the UK Corporate Governance Code and supporting guidance to give remuneration committees greater responsibility for demonstrating how pay and incentives align across the company, and to explain to the workforce each year how decisions on executive pay reflect wider pay policy.
- The government will introduce secondary legislation that requires quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce.
- The government will introduce secondary legislation that requires quoted companies toprovide a clearer explanation in remuneration policies of the range of potential outcomes from complex, share-based incentive schemes.
- The government will invite the FRC to consult on a proposal to increase from three years to five years the minimum holding period for share-based remuneration.
The last major reform to the rules relating to directors’ pay came with the enactment of the Enterprise and Regulatory Reform Act 2013. Prior to the Act’s passing, the Coalition Government published a consultation document that contained a number of far-reaching and notable proposals, such as annual binding votes and votes that would require supermajorities to pass. In the event, the more noteworthy proposals were dropped and the reforms contained in the 2013 Act were rather modest (even the much-hyped binding vote has not really had much of an impact, with the vast majority of remuneration resolutions being easily passed). The same process is evident in the government’s response document, with the Green Paper’s more notable reform suggestions (e.g. annual binding votes) being dropped in favour of a much more modest set of reforms. The Conservative Party’s 2017 election manifesto also stated that ‘[t]he next Conservative government will legislate to make executive pay packages subject to strict annual votes by shareholders …’ All told, whilst there are some useful reforms here (notably, the requirement to publish pay ratios), they are unlikely to have a notable impact upon the regulation of directors’ remuneration and have largely been regarded as somewhat underwhelming.
Strengthening the employee, customer and wider stakeholder voice
The reforms contained in the response document are:
- Introducing secondary legislation to require all companies of a significant size to explain how their directors comply with the s 172 duty. This is not an especially noteworthy reform. Directors (except directors of small companies) are already under a duty to publish a strategic report as part of the annual report. The purpose of this report is ‘to inform members of the company and help them assess how the directors have performed their duty under section 172.’ The reform does extend some requirements that only apply to quoted companies to all companies of a significant size.
- The government will invite the FRC to consult on developing a new principle in the UK Corporate Governance Code that will establish the importance of strengthening the voice of employees and other non-shareholder interests at board level.
- The FRC will be invited to consider a Code provision requiring Premium-listed companies to adopt, on a comply or explain basis, one of three employee engagement mechanisms: a designated NED; a formal employee advisory council; or a director from the workforce. Again, this represents a weakening of the government’s original position. The Conservative’s 2017 election manifesto stated that listed companies would be legally required to introduce one of these three mechanisms. Indeed, when Theresa May ran for the leadership of the Conservative Party, she pledged to introduce a system of worker representation on company boards. The proposals in the response document fall far below this.
- The government will ask ICSA and the Investment Association to complete their joint guidance on practical ways in which companies can engage with employees and other stakeholders at board level.
- The government invites the GC100 group to complete the work it is undertaking to prepare and publish new advice and guidance on the practical interpretation of the directors’ duty in s 172.
Accordingly, the one reform that the government itself will introduce (namely introducing secondary legislation to require all companies of a significant size to explain how their directors comply with the s 172 duty) is a rather modest one, whereas responsibility for all the other reforms has been offloaded to outside bodies.
Corporate governance in large privately-held businesses
Reforms here include:
- The government will invite the FRC to work with other bodies (notably the Institute of Directors (who have already published a code for unlisted companies) and the CBI) to develop a voluntary set of corporate governance principles for large private companies. The development of a corporate governance code for large private companies is welcome (see an earlier blog post where I argued that a new code is preferable to extending the UK Corporate Governance Code), but what about public companies? The UK Corporate Governance Code focuses on those companies with a Premium listing, but governance is also relevant to unlisted public companies. We could end up with a situation where seperate codes exist for large listed companies and large private companies, but no code exists for public companies (which could be unlisted, but larger than large private companies).
- The government will introduce secondary legislation to require all companies of significant size to disclose their corporate governance arrangements in the Directors’ Report and on their website.
Whilst some of the reforms are welcome, most are rather underwhelming and merely tweak our governance system, as opposed to bringing about any substantial change. Further, a notable number of the reforms are mere invitations to outside bodies to consider certain reforms. The press release accompanying the publication of the response document refers to a ‘[w]orld-leading package of corporate governance reforms.’ Given the modesty of the reforms, this is something of an overstatement. However, it should also be noted that the response document is very light on detail, and so final judgement can only be rendered once more detailed reform proposals are published.