The Amended Shareholders’ Rights Directive

EU Directive 2017/828 has now been published in the Official Journal and will come into force on the 9th June 2017. The Directive serves to amend Directive 2007/36/EC, which is more commonly known as the Shareholders’ Rights Directive (‘SRD’). The SRD was passed in 2007 ‘with a view to enhancing shareholders’ rights in listed companies.’ The financial crisis revealed that many shareholders supported management’s excessive short-term risk-taking and so, in 2012, the EU Commission published an Action Plan which set out the initiatives the Commission intended to take in order to enhance transparency and engage shareholders. Directive 2017/828 is the result.

The Amendments

The principal amendements to the SRD are:

  • Identification of shareholders: Shares in listed companies are often held through complex chains of intermediaries, which can make it difficult or impossible for a company to identify its shareholders. This, in turn, makes it difficult for companies to contact shareholders, which is an essential feature to facilitating the exercise of shareholder rights. Accordingly, a new Art 3a is inserted which provides that Member States shall ensure that companies have the right to identify their shareholders. To faciliate this, companies will have the right to collect personal data on their shareholders ‘in order to enable the company to identify its existing shareholders in order to communicate with them directly with the view to facilitating the exercise of shareholder rights and shareholder engagement with the company.’ Companies will be able to store this data for as long as they remain shareholders.
  • Institutional investor engagement: A new Art 3g provides that Member States shall ensure that institutional investors and asset managers comply with two requirements, or publicly disclose a reasoned explanation as to why they have not complied. The two requiremrnts are (i) institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate sahreholder engagement into their investment strategy, and; (ii) institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented.
  • Institutional investor investment strategy: A new Art 3h provides that Member States shall ensure that institutional investors public disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilites, and how they contribute to medium to long-term performance of their assets.
  • Transparency of asset managers: A new Art 3i provides that Member States shall ensure that asset managers disclose, on an annual basis, certain information to their institutional investors, such as how their investment strategy and implementation thereof complies with the arrangements in Art 3h and contributes to the medium to long-term performance of the assets of the institutional investor or the fund.
  • Transparency of proxy advisors: A new Art 3j provides that Member States shall ensure that proxy advisors publicly disclose reference to a code of conduct which they apply and report on. If such proxy advisors depart from the recommendations of this code of conduct, they shall explain from which parts they depart, provide explanations for doing so and, where appropriate, any alternative measures adopted. Where proxy advisors do not apply a code of conduct, they shall provide a clear and reasoned explanation why this is the case. All proxy advisors will be required to diclose inforamtion set out in Art 3j(2).
  • Right to vote on remuneration policy: A new Art 9a provides that Member States shall ensure that companies establish a remuneration policy as regards directors, and that shareholders have the right to vote on the remuneration policy at the general meeting. Member States may allow companies, in exceptional circumstances, to temporarily derogate from the remuneration policy, provided that the policy includes the procedural conditions under which the derogation can be applied and specifies the element of the policy from which derogation is possible. The company’s remuneration policy shall contribute to the company’s business strategy and long-term interests and sustainability, and shall explain how it does so. The remuneration policy shall explain how the pay and employment conditions of employees of the company were taken into account when establishing the remuneration policy.
  • Transparency and approval of related party transactions: Transactions with persons related to the company can adversely affect the company and its shareholders, or place the directors in a conflict position. Accordingly, a new Art 9c provides that each Member State shall define what a ‘material transaction’ is. Companies that enter into material transactions with related parties must publicly announce the transaction at the latest at the time the transaction is concluded, and provide specified information relating to the transaction. Member States shall ensure that material transactions with related parties are approved at the general meeting or by the administrative or supervisory body of the company. Where the administrative or supervisory body has approved the transaction, then Member States may require that the shareholders in general meeting then have the right to vote on the transaction.


Member States have until the 10th June 2019 in which to implement the amended Directive. Remember that, until the UK formally leaves the EU, it remains bound to implement EU law. Article 50 has now been triggered and if, as expected, the UK leaves by the end of the Art 50 period (i.e. by the 29th March 2019), then the Amended Directive will not apply, unless the UK decides to implement it prior to leaving the EU. Accordingly, it will be interesting to see whether the government decides to begin the process of implementing the Directive.

Further information

The EU Commmission’s factsheet on the SRD can be found by clicking here. The EU Council’s press release on the amendments made to the SRD can be found by clicking here.

Company Law and the 2017 Manifestos

The three main political parties have now published their manifestos for the 2017 General Election, and each of the manifestos contain some interesting company law and corporate governance-related pledges. Beginning with the Conservative Party’s manifesto, which contains the following pledges:

  • Corporation Tax will fall to 17% by 2020.
  • The rules that govern mergers and takeover will be updated. Details on this are scant, but the manifesto does state that (i) bidders will be required to be clear about their intentions from the outset of the bid process; (ii) all promises and undertakings made in the course of takeover bids can be legally enforced; and (iii) the government will be empowered to require a bid be paused to allow greater scrutiny.
  • Executive pay packages will be subject to strict annual votes by shareholders. It is not clear if the entire pay package will be subject to a binding vote or whether, as is the current case, certain parts will be subiect to a binding vote and others to an advisory vote.
  • Employees’ interests will be represented at board level, either through requiring listed companies to nominate a director from the workforce, creating a formal employee advisory council, or assigning responsibility for employee representation to a non-executive director. Employee board representation would be  significant reform that has been opposed by companies when suggested in the past, which is why it is highly unlikely to happen. If it happens, my bet would be that the government will adopt the least radical method, namely assigning responsibility for employee representation to a non-executive director.
  • The government will consult on how to strengthen the corporate governance of private companies. Given that this is a major plank of the corporate governance green paper, this is unsurprising. The question is whether this will be done by extending the UK Corporate Governance Code to cover private companies, or whether a new Code will be created (I have blogged about this here and here).

Moving onto the manifesto of the Labour Party, which contains the following pledges:

  • Corporation Tax will be increased, but small businesses will become subject to the re-introduced lower small profits rate.
  • Labour will establish a National Investment Bank, which will support a network of regional development banks.
  • Labour will amend company law (by which they presumably mean s 172 of the CA 2006) so that directors owe a duty to shareholders, employees, the customers, and the wider public. This would represent a massive shift in company law, as the long-held principle is that, generally, directors owe their duties only to the company. The issue that arises is that it is extremely difficult to effectively draft a statement of duties that can be enforced by so many persons. By making the directors owe duties to so many persons, the danger is that accountibility is actually reduced, as the directors can justify almost any action as benefitting one of these groups.
  • Labour will amend the takover regime to ensure that businesses that are ‘systemically important’ (usually defined as those whose collapse would cause a serious risk to the economy) have a clear plan in place to protect workers and pensioners when a company is taken over.
  • Labour would aim to reduce pay inequality by introducing an Excessive Pay Levy on companies with staff with very high pay. No further details on this have been provided.
  • Labour would introduce maximum pay ratios of 20:1 for companies bidding for public sector contracts.
  • Labour would scrap quarterly reporting for businesses with a turnover of under £85,000.
  • Labour would implement the Parker Review on ethnic diversity in the workplace. Quite what ‘implement’ means is unclear. Would legislation be introduced or would a voluntary goal (as with Lord Davies’s review be established) be established with backup from the UK Corporate Governance Code?

Finally, the Liberal Democrats’ manifesto pledges the following:

  • The Liberal Democrats are the only party pledging to remain in the single market.
  • Corporation Tax would be increased to 20%.
  • Tax evasion would be tackled by introducing a General Anti-Avoidance Rule.
  • Extend transparency requirements so that larger employers would have to publish the number of people paid less than the National Living Wage and the ratio between top and median pay.
  • Staff in listed companies with more than 250 employees would be given the right to request shares.
  • Strengthen worker-participation in companies by having worker representation on remuneration committees, and the right for employees of a listed company to be represented on the board. The manifesto goes on to say that the law would be changed to permit a Germany style two-tier board structure to include employees, but no change is necessary as the current law does not prohibit such a board structure. The Lib Dems likely mean that the law would change to expressly cater for such a board structure. Given the dominance of the unitary board structure in the UK, this would be a major reform, and there has not really been an appetite from UK companies to establish a two-tier board.
  • The Lib Dems would ‘[r]eform fidduciary duty and company purpose rules to ensure that other considerations, such as employee welfare, environmental standards, community benefit and ethical practice, can be fully included in decisions made by directors and fund managers.’ Section 172(1) of the CA 2006 already requires directors to have regard to most of these factors, so this might not (depending on the details) mbe much of a change.
  • The Lib Dems would ‘[r]educe the reporting requirement for disclosure of shareholdings to 1% in order to increase transparency over who owns stakes in the biggest companies.’ This would represent a significant extension of the number of persons who would be required to be listed on a company’s PSC register.
  • The manifesto pledges to require binding and public votes of board members on executive pay policies. For quoted companies, the policy section of the remuneration report is already subject to a binding vote. The wording indicates that it will be board members that will be required to publicly vote, but it is well established principle of governance that directors should not be involved in determining their own pay. Quite what a ‘public vote’ is is unclear.
  • The Lib Dems will continue to improve board diversity by pushing for at least 40% of board members being women in FTSE 350 companies by 2025. The current Hampton-Alexander Review is aiming for 33% female board representation in FTSE 350 companies by 2020. The Lib Dems also pledge to implement the recommendations of the Parker Review on ethnic diversity.
  • Companies with over 250 employees will be required to monitor and publish data on gender, BAME, and LGBT+ employment levels and pay gaps.

Oveall, all three manifestos contain some noteworthy company law and governance reform pledges. However, all the manifestos are thin on details and, as tends to be the case with company law reform, the more radical reforms will likely be killed off rather quickly. One final point worth noting is that, with the mammoth task of negotiating the UK’s exit from the EU looming, one has to ask how much time and attention the new goverment can actually devote to any of these company law-related pledges.

Tesco, False Accounting and Market Abuse

On the 29 August 2014, Tesco plc published a trading update in which it stated that its expected trading profits for the previous six months’ would amount to £1.1 billion. This figure was based on information that had been provided to it by one of its subsidiaries, Tesco Stores Ltd. This information was incorrect, which meant that the trading update overstated the company’s profits by around £326 million. On the 22 September 2014, Tesco published a further trading update in which it acknowledged that it had ‘identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs.’ Tesco admitted that this amounted to false accounting and market abuse.

Deferred prosecution agreement

In relation to Tesco’s false accounting, on the 28 March 2017, Tesco plc and the Serious Fraud Office announced that a Deferred Prosecution Agreement had been reached in principle (the DPA will not become effective until the court has approved it – the hearing to determine this will take place on the 10 April 2017). Under the DPA, Tesco plc will not be prosecuted for false accounting, but it will pay a financial penalty of just under £129 million and the SFO’s costs. It should be noted that the DPA only relates to the criminal liability of Tesco Stores Ltd. It does not address whether criminal liability attaches to Tesco plc, or any employee or agent of Tesco plc or Tesco Stores Ltd. Three former Tesco executives have been charged with fraud offences by the SFO and are due to stand trial in September 2017.

Market abuse

Although the £129 million penalty grabbed the headlines, from  a company law perspective, it is the market abuse issue that is more interesting. The overstatement of profits gave a false or misleading impression about Tesco plc’s shares, thereby constituting market abuse under s 118(7) of the Financial Services and Markets Act 2000 (this provision has been repealed and replaced by Arts 12 and 15 of the EU Market Abuse Regulation). Basically, the overstatement resulted in the price of Tesco plc’s shares being inflated, and persons who purchased shares based on the overstatement understandably felt aggrieved.

Tesco plc and Tesco Stores Ltd admitted it had engaged in market abuse, but instead of issuing a penalty, the Financial Conduct Authority took a different approach. Section 384(5) of FSMA 2000 empowers the FCA to require those who engage in market abuse to provide restitution to those investors who suffered loss. Accordingly, the FCA exercised this power and required Tesco to set up a redress scheme which will compensate affected shareholders (see the FCA’s press release,the Final Notice, and the Tesco Redress Scheme FAQ for more details). This scheme, which will be administered by KPMG, is estimated to cost Tesco around £85 million plus interest, meaning that, including the DPA penalty and associated costs, the affair will cost Tesco around £235 million (assuming no further liability arises).


Surprisingly, this is the first time that the FCA has exercised the power under s 384 to order the payment of compensation. All things considered, Tesco may have cause to be grateful regarding the outcome. As a result of Tesco’s cooperation and agreement to pay compensation, the company faces no penalty for engaging in market abuse. Tesco will hope that the compensation scheme will stave off litigation from shareholders (shareholders who accept compensation under the scheme will be required to sign a release giving up claims against Tesco in relation to the overstatement). However, the scheme is voluntary only and affected investors who do not accept compensation under the scheme are free to commence proceedings against Tesco. Indeed, in October 2016, over 125 of Tesco’s institutional investors commenced proceedings against Tesco, claiming over £100 million. These investors will examine closely the terms of the compensation scheme before deciding whether to continue proceedings. Tesco will hope that it can draw a line under this whole affair and move on to address the commercial challenges it is currently facing, but this will depend on whether the terms of the redress scheme are acceptable to the affected shareholders.

Reviewing the UK Corporate Governance Code

2017 marks the 25th anniversary of the Cadbury Report. Since 1998, the Combined Code and the UK Corporate Governance Code have been pioneering in improving governance standards and have acquired worldwide respect. However, in a recent speech, Sir Win Bischoff, Chairman of the FRC, noted that trust in business continues to decline. It is therefore fitting that 2017 will also see what the FRC has labelled as a ‘fundamental review‘ of the UK Corporate Governance Code. Details of the review are currently sparse, but the FRC’s announcement does reveal that the FRC will issue a public consultation on its proposals later this year. Following the 2016 update to the Code, the FRC committed to not updating the Code further until 2019. It would now seem that this commitment has been abandoned, but there are several good reasons for this abandonment:

  • The outcome of the government’s Green Paper on corporate governance reform (discussed here) will likely necessitate amendments to the Code.
  • The FRC has undertaken work in relation to succession planning and corporate culture that it will wish to incorporate into the amended Code.
  • The FRC recently set up a Stakeholder Advisory Panel and this panel will undoubtedly have a notable role to play in amending the Code.
  • Since the BHS scandal, there has been increasing pressure for the UK corporate governance system to be broadened to cover private companies (currently the Code expressly states that it applies only to companies with a Premium listing). Last week, the House of Commons Work and Pensions Committee recommended that large private companies or those that have over 5,000 defined benefit pension scheme members should be made subject to the UK Corporate Governance Code on a comply or explain basis (ICSA has made a similar suggestion). It will be interesting to see to what extent to amended Code caters for the governance of private companies.

One notable omission is any reference to the UK Stewardship Code. Sir Win Bischoff did state that the review of the UK Corporate Governance Code will cover ‘the role of stewardship’, but it is disappointing that an update to the Stewardship Code was not announced, as it is probably in greater need of an update than the UK Corporate Governance Code. It was last updated in 2012 and, whilst the FRC’s latest Developments in Corporate Governance and Stewardship Report (discussed here) does state that an update to the Stewardship Code is possible in 2018, confirmation of an update would have been welcome.

Parent Companies and the Duty of Care

One issue that repeatedly arises in corporate law discourse is the extent to which a parent company can be liable for the acts or omissions of its subsidiary. As each company in a corporate group has its own corporate personality, the general response is that parent companies are not liable for the acts/omissions of their subsidiaries. Liability could be imposed on a parent company if the corporate veil of the subsidiary can be pierced, but since the Supreme Court decision of Prest v Petrodel Resources Ltd narrowed the instances in which the corporate veil can be lifted (and narrowed the definition of what constitutes a lifting of the veil),this will be very difficult to establish in practice.

An alternative method is to establish that a parent company owes a duty of care to those affected by the relevant acts/omissions of the subsidiary. This was argued successfully in Chandler v Cape plc, and the High Court has recently revisited this method in His Royal Highness Okpabi v Royal Dutch Shell plc.


Shell Petroleum Development Co of Nigeria Ltd (‘SPDC’) was a Nigerian-based company that conducted onshore oil operations in Nigeria. SPDC was a subsidiary of Royal Dutch Shell plc (‘RDS’), a company based in the UK. It was alleged that oil spills from SPDC’s pipelines had caused ‘serious and ongoing pollution and environmental damage’ to wide areas of the Niger Delta and the waters of the Delta itself. The defendants did not dispute this (although they did attribute other causes to the damaged pipelines, such as locals damaging the pipes to steal the oil).

The claimants (of which there were around 42,500) commenced proceedings against both SPDC and RDS but, for our purposes, it is the claim against RDS which is of interest. The claimants argued, inter alia, that RDS owed a duty of care to those persons affected by the activities of SPDC, and therefore it should be liable for the damage caused.


The claimants’ case failed and the High Court held that RDS did not owe them a duty of care. Fraser J stated that the starting point was the three-part test in Caparo Industries plc v Dickman, namely forseeability, proximity, and reasonableness.Fraser J stated, at paras 114-5) that the claimants would have difficulty establishing the second and third parts of the test.

Fraser J also examined the various authorities, notably Chandler. In Chandler, Arden LJ identified four factors that could indicate the existence of a duty of care, namely:

(1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees’ protection.

Fraser J stated that, when approaching these four factors, a two-stage approach is to be adopted, namely ‘[t]he first is whether the parent company is better placed than the subsidiary. The second is, if the finding is that the parent company is better placed, whether it is fair to infer that the subsidiary will rely upon the parent.’ He went on to state that the four factors were:

descriptive rather than exhaustive, the presence of some, or all, of those factors, would bring any particular case more closely within the scope of a duty of care owed by a parent company, the existence of which has already been recognised by the Court of Appeal. The higher the number of those four factors that are present, the more likely that will be.

Fraser J held (at para 116) that none of the four factors identified by Arden LJ were present here. He also stated that ‘a duty of care is more likely to be found in respect of employees, a defined class of persons, rather than others not employed who are affected by the acts or omissions of the subsidiary.’


This case provides additional (albeit limited) guidance on the factors to be applied when determining whether a parent owes a duty of care to persons affected by the actions/omissions of its subsidiaries. Clearly, cases in this area are highly fact-specific and the relationship between RDS and SPDC was of notable importance. This is only a first instance decision and the claimants have indicated that they intend to appeal. This blog post will be updated if permission to appeal is granted and if an appeal decision is handed down.

Developments in Corporate Governance and Stewardship

Yesterday, the Financial Reporting Council published its latest report on Developments in Corporate Governance and Stewardship. This report, which marks the 25th anniversary of the publication of the Cadbury Report, has four key aims:

  1. to give an assessment of corporate governance and stewardship in the UK;
  2. to report on the quality of compliance with the UK Corporate Governance Code and the UK Stewardship Code;
  3. to set out the FRC’s findings on the quality of engagement between companies and shareholders, and;
  4. to indicate changes in corporate governance and behaviour that the FRC would like to see occur.

The report notes that compliance with the UK Corporate Governance Code continues to be high, with 62% of FTSE 350 companies reporting full compliance with the UK Corporate Governance Code. 90% of FTSE 350 companies reported compliance with all, or all but one or two, of the Code’s provisions. However, there were some notable areas where compliance could be improved, with the provision least complied with being the recommendation that at least half the board consist of independent NEDs (26 FTSE 350 companies did not report compliance with this provision, although this was down from the 42 non-compliant companies in 2015).

Given the debate surrounding directors’ remuneration, it is unsurprising that the report notes that the 2016 AGM season saw reduced shareholder support for remuneration resolutions, with particular concern noted regarding the lack of transparency between executive pay and performance. The report notes a 24% increase in the number of resolutions with a significant minority vote against the recommendation of the board. The 2014 updated to the Code introduced new recommendations regarding the ability of companies to withhold or clawback variable pay from directors. The report notes that 91% of FTSE 350 companies have put in place a clawback provision on the annual bonus, and 78% allow for clawback of long-term plans.

Concerning amendments to the Code, the FRC has committed to not amending the Code again until 2019 at the earliest. However,it would appear that the FRC is moving away from this commitment. In the Foreword to the report, Sir Winn Bischoff, Chairman of the FRC, stated that ‘[t]he FRC stands ready to revise the UK Corporate Governance Code and its associated guidance.’ In a statement accompanying the report, Paul George, Executive Director of the FRC’s Corporate Governance and Reporting Department stated that ‘The FRC stands ready to revise the UK Corporate Governance Code and associated guidance in 2017.’The report itself states that ‘[t]his year we will review our Guidance on Board Effectiveness as part of our consultation on the UK Corporate Governance Code and associated guidance…’ This apparent change in position is likely a response to the government’s Corporate Governance Review (which I blogged about here), the results of which would likely necessitate amendments to the Code.

As regards stewardship, perhaps the most noteworthy piece of information is that the report states that the FRC will possibly revise the UK Stewardship Code in 2018. The Code is in dire need of updating, given that it is still largely based on the 2009 ISC Code (which was not regarded as overly effective in the first place), and the fact that the UK Stewardship Code itself was last updated in 2012 (and this update was relatively minor). The UK Corporate Governance Code has received regular updates (in 2012, 2014, and 2016) and it is notable that updates to the UK Stewardship Code have been much less frequent.

The Corporate Governance Review

Today, the Department for Business, Energy & Industrial Strategy launched a corporate governance review, accompanied by a Green Paper on corporate governance reform. The need for a review was set out by the Prime Minister in the Green Paper’s introduction:

‘for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. Where this social contract breaks down and individual businesses decide to play by their own rules, faith in the business community as a whole diminishes – to the detriment of all. It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change.’

Although the title of the Green Paper (‘Corporate Governance Reform’) indicates a broad, wide-ranging discussion, the Paper does not provide a review of corporate governance in general, and instead focuses on three specific issues, with a very brief ‘other issues’ category at the end of the Paper. The Paper does stress that the Paper is designed to ‘stimulate a debate on a range of options for strengthening the UK’s corporate governance framework’ and that ‘[t]he Government does not have preferred options at this stage.’ Accordingly, this Paper is merely the first step on what may prove to be a lengthy reform process (especially as large parts of the government and civil service will be preoccupied with Brexit). These areas and the suggested potential reforms will be set out.

Executive pay

The first governance issue discussed is one of the more controversial, namely executive remuneration. The Paper notes that ‘there is a widespread perception that executive pay has become increasingly disconnected from both the pay of ordinary working people and the underlying long-term performance of companies.’ The Paper discusses five areas where the regulation of executive remuneration in quoted companies could be reformed:

  1. Shareholder voting and other rights: The Paper puts forward a number of possible options for reform, namely (i) increasing the scope of the binding vote; (ii) introduce stronger consequences for a company losing the advisory vote; (iii) requiring or encouraging quoted companies to set an upper threshold for annual pay and requiring a binding vote if pay exceeds that threshold; (iv) requiring the binding vote to be held more frequently than the current three-year period, and; (v) strengthening the UK Corporate Governance Code to provide greater specificity on how companies should engage with shareholders on pay.
  2. Shareholder engagement on pay: The Paper discusses several reforms aimed at improving shareholder engagement on pay issues, namely (i) mandatory disclosure of fund managers’ voting records at AGMs and the extent to which they made use of proxy voting; (ii) establishing a senior shareholder committee to engage with executive remuneration arrangements, and; (iii) considering ways to facilitate or encourage individual retail shareholders to exercise their rights to vote on pay and other corporate decisions.
  3. The remuneration committee: The Paper notes the existence of concerns that ‘remuneration committees are not sufficiently or visibly pro-active in consulting formally with shareholders and with the company’s workforce. There are concerns too, that some lack the authority or inclination to take positions that may not align with the CEO or wider executive team’s expectations.’ Accordingly, the Paper suggests potential reforms, namely (i) requiring the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy, and; (ii) requiring the chairs of remuneration committees to have served for at least 12 months on the remuneration committee before taking up the role.
  4. Transparency: The Paper states that ‘[t]he Government wants to explore whether there is additional information which companies could provide which would make shareholders more effective in holding boards to account on their executive pay arrangements.’ The suggested potential reforms are (i) requiring companies to publish ratios comparing CEO pay to that of the wider workforce, and; (ii) whether existing requirements regarding the disclosure of performance targets that trigger bonuses need to be strengthened.
  5. Long-term executive pay incentives: The Paper looks at possible reforms either replacing or amending practice regarding long-term incentive plans.

Strengthening stakeholder voice

The second major issue the Paper focuses on is strengthening the employee, customer, and wider stakeholder voice. The Paper notes that ‘[m]any companies and their boards recognise clearly the wider societal responsibilities they have and the enormous benefit they gain through wider engagement around their business activities.’ However, it then goes on to state that ‘some have said that companies need to do more to reassure the public that they are being run, not just with an eye to the interests of the board and the shareholders, but with a recognition of their responsibilities to employees, customers, suppliers and wider society.’ To that end, suggested potential reforms include (i) creating stakeholder advisory panels; (ii) designating existing non-executive directors to ensure that the voices of key interested groups, especially that of employees, is being heard at board level; (iii) appointing individual stakeholder representatives to company boards, and; (iv) strengthening the reporting requirements relating to stakeholder engagement.

Corporate governance in private companies

The recent BHS scandal has focused attention on corporate governance and private companies (see blog post here on this). The Paper notes that private companies ‘are not expected or required to meet the same formal corporate governance and reporting standards as publicly listed companies, yet the consequences when things go wrong can be equally severe for other stakeholders.’ Accordingly, several suggested reforms include (i) extending the UK Corporate Governance Code to private companies, or developing a new Code aimed at such companies, and; (ii) extending the scope of certain reporting requirements to cover certain private companies.

Other issues

The final major section of the Paper is entitled ‘other issues’, but it only really focuses on one issue, namely whether the UK’s comply or explain system remains effective in providing the right combination of high standards and low burdens.


The Green Paper is a welcome development and it contains a raft of reforms that deserve wider discussion. However, it does only focus on a few specific areas of corporate governance (admittedly those that have drawn most ire in recent years). Governments and businesses will regularly talk of the importance of having strong governance standards, but reforms in this areas have tended to be rather tepid. It will be interesting to see how committed the government is to governance reform, especially if Brexit does cause the UK to become a more unattractive place to do business.

The Next Stage in Boardroom Gender Diversity

November has been a busy month for the issue of boardroom diversity. Earlier, this month, the Parker Review on ethnic diversity in the boardroom was published (discussed here), and now the Hampton-Alexander Review have published its first report on FTSE Women Leaders.

The Hampton-Alexander Review succeeds the review led by Lord Davies that took place between 2011 and 2015. There can be no doubt that notable progress was made in that period. In 2011, women accounted for 12.5% of FTSE 100 directors, but this had risen to 26.1% by the end of 2015. In 2010, there were 21 FTSE 100 companies with no female directors at all, whereas today, there are no all-male boards in the FTSE 100. However, it is also acknowledged that the Davies Review was not an unqualified success:

  • The gains made in the FTSE 250 were less modest than in the FTSE 100. By the end of 2015, women accounted for 19.6% of FTSE 250 directors, and there was 15 companies in the FTSE 250 that did not have any female directors.
  • The most notable failure of the Davies Review was the poor increase in the number of female executive directors. In 2011, there were only 18 female directors in the FTSE 100 (accounting for 5.5% of the total number of directors). By 2015, this had only risen to 26 (9.6% of the total).

The Hampton-Alexander Review aims to combat these issues in two ways. First, whereas the Davies Review largely focused on FTSE 100 companies, the Hampton-Alexander Review focuses on FTSE 350 companies. The principal goal set by the Hampton-Alexander Review is that FTSE 350 companies should aim for a minimum of 33% female representation by the end of 2020. The Hampton-Alexander Review notes that, as of November 2016, the figure is stands at 23%.

Second, the Hampton-Alexander Review focuses much more strongly on the ‘executive pipeline challenge’ and all CEOs of FTSE 350 companies should take action to improve the under-representation of women on the Executive Committee and in the layer immediately below. Unfortunately, the Review then goes on to recommend that FTSE 100 companies should aim for a minimum of 33% women’s representation across their Executive Committee by 2020. It is disappointing that no goal has been set for FTSE 250 companies, but the Review does note that it did not obtain enough data to set a goal for FTSE 250 companies, and it hopes to acquire more data in 2017.

The Davies Review established a firm foundation, but much more work needs to be done. It is hoped that the recommendations of the Hampton-Alexander Review will improve female representation in those ares where progress was weak, In particular, if the benefits of boardroom diversity are to be realised, it is important that women are placed in positions of leadership, and not confined to relatively powerless non-executive director positions. FTSE 350 companies will undoubtedly commit to the Hampton-Alexander Review, but it is hoped that they commit to the spirit of the Review, and not just the letter.

Boardroom Diversity: Diversifying the Debate

Since the publication in 2011 of Lord Davies’s Women on Boards Report, boardroom diversity has been a prominent governance topic. However, the debate has focused almost exclusively on one type of boardroom diversity, namely gender diversity. This was not always the case. The 2003 Higgs Review on the effectiveness of non-executive directors stated that ‘it is the range of skills and attributes acquired through a diversity of experiences and backgrounds that combine to create a cohesive and effective board.’ In the same year, the overlooked Tyson Report stated that ‘[d]iversity in the backgrounds, skills, and experiences of NEDs enhances board effectiveness by bringing a wider range of perspectives and knowledge to bear on issues of company performance, strategy and risk.’ Both of these reports recognised that boardroom diversity is not just about gender, and that numerous forms of diversity should be encouraged. Despite this, as noted, the debate has almost exclusively focused on gender diversity. Indeed, this emphasis is evident from the UK Corporate Governance Code, which states that ‘[t]he search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.’ Although diversity in general is noted, the express reference to gender indicates that gender diversity is currently dominant.

In other words, the diversity debate has, itself, lacked diversity. Fortunately, a recent report has been published which seeks to broaden the debate by examining ethnic diversity in the boardroom. The Parker Review into the Ethnic Diversity of UK Boards was published in November 2016, and like Lord Davies’s 2011 report, it begins by setting out a bleak picture of diversity. Amongst the FTSE 100, UK citizen directors of colour only account for around 8% of total director population. Of the 1,087 directors holding board positions in the FTSE 100, only 90 are persons of colour. 53% of FTSE 100 companies do not have any directors of colour at all, and only 9 people of colour hold the position of chairman or CEO.

Like the Davies Reports, the Parker Review rejected the introduction of quotas, and instead proposed a series of recommendations, of which the principal ones are:

  • Each FTSE 100 board should have at least one director of colour by 2021, and each FTSE 250 board should have at least one director of colour by 2024.
  • Nomination committees of FTSE 350 companies should require their human resources teams or search firms to identify and present qualified people of colour to be considered by the board when vacancies occur.
  • A description of the board’s policy on diversity should be set out in the company’s annual report. Companies that do not meet the board composition targets should explain in the annual report why they were not met.

It is hoped that the Parker Review gains the same level of traction and support that Lord Davies’s review garnered. Whilst Lord Davies’s review has not been entirely successful (namely the increase in female executive directors has been poor), it has improved the gender makeup of boards in a notable manner, and the goals set by Lord Davies were broadly met (notably the 25% by 2015 goal). Hopefully, the Parker Review can have a similar effect on UK boards in relation to ethnic diversity, and begin the process of widening the boardroom diversity debate.

Corporate governance and private companies

In a recent blog post, I discussed how the recent BHS scandal has ignited the debate surrounding corporate governance and private companies. Recently, the Institute for Chartered Secretaries and Administrators (ICSA) has suggested two reforms that aim to improve governance among private companies. This blog post is focusing on the first (a later post will focus on the second), namely that ‘private companies required under the [CA 2006] to have audited accounts and to produce a directors’ report should be required to disclose in their annual report the extent to which they comply with the UK Corporate Governance Code.’ ICSA has wisely decided not to suggest that all private companies should be required to report against the Code, and by focusing on private companies that require audited accounts, a significant number of private companies would be excluded from the requirement to report (largely via the small company exemption). However, even requiring these companies to report may be problematic for several reasons.

First, the specified private companies would be ‘required’ to report their compliance with the Code. In relation to listed companies, the requirement to comply or explain is found in the Listing Rules (see LR 9.8.6R(5) and (6)), and the requirement to include a corporate governance statement is found in the Disclosure and Transparency Rules. As these rules do not apply to private companies, requiring private companies to report on compliance would require legislation, likely an amendment to the CA 2006 or the subordinate legislation that fleshes out the reporting requirements. This problem this creates is that, currently, only listed companies are required to comply or explain against the Code, meaning that unlisted public companies are not so required. If ICSA’s suggested reform was implemented, it would result in private companies being subject to a stricter requirement than public companies, which runs counter to the ‘think small first’ philosophy found in the CA 2006. If private companies are to be required to report, then surely public companies should be too?

Within ICSA, this view appears to exist. A blog post by Peter Swabey, ICSA’s Policy & Research Director, stated that ‘we advocate that all organisations large enough to require audited accounts, whether listed companies or not, should be required to indicate in their annual report where they have not complied with the UK Corporate Governance Code …’ Clearly, Peter Swabey believes that the requirement to report against the Code should not just be limited to private companies, but to all companies that require audited accounts. It would be useful for ICSA to officially clarify whether it believes that unlisted public companies should be required to report against the Code too.

The second criticism is that ICSA states that private companies should be required to report their compliance with the Code, but it does not expressly state whether they should be required to explain non-compliance (as listed companies are required to do). Again, Peter Swabey’s blog provides more information, stating that ‘we advocate that all organisations large enough to require audited accounts, whether listed companies or not, should be required to indicate in their annual report where they have not complied with the UK Corporate Governance Code and the reasons why they have chosen not to do so‘ (italics added). This indicates that the relevant private companies would be required to comply and explain against the Code. The issue that arises here is that the Code was written with listed companies in mind, and many of the Code’s recommendations will likely be unsuitable for private companies. Indeed, Peter Swabey acknowledges this stating that ‘[p]rivate companies should simply be expected to have more areas where they depart from the existing UK Corporate Governance Code.’ The problem that arises is that private companies would therefore have to spend more time explaining non-compliance than other companies, as they would be departing from more of the Code’s recommendations. For some private companies, this could prove unnecessarily burdensome. Further, given that the quality of explanations for non-compliance offered by listed companies has been criticised, one might wonder at how useful explanations from smaller companies would be.

In my opinion, legislatively requiring private companies to report against the UK Corporate Governance Code would be misguided. If private companies are to be subject to a corporate governance code, then it should be one that is designed for private companies. The CA 2006 recognises that public and private companies must be regulated differently and the same is true as regards corporate governance. I am also of the opinion that, if such a specific code were created, we should, initially at least, encourage private companies to report against it, rather than compelling them. This could be done by amending the model articles to provide that the directors will prepare a report setting out how the company has complied with the code. If the directors or members feel that such reporting is unwarranted, the relevant provision could be removed. If, in time, such reporting became more commonplace, the case for mandatory reporting might be stronger. Whatever solution is implemented, ICSA are absolutely correct to note that governance in private companies is just as important as governance in listed companies, and the time has come to act.

Update (14/02/2017)

Yesterday, the House of Commons Work and Pensions Committee published its response to the government’s Corporate Governance Review. The Committee has recommended that large private companies or those that have over 5,000 defined benefit pension scheme members should be made subject to the UK Corporate Governance Code on a comply or explain basis.