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Corporate Governance Reform - where are we now?

23 March 2018

The government’s green paper, Corporate Governance Reform, sought views from a broad cross-section of business and society on specific aspects of corporate governance – executive pay, corporate governance in large privately held businesses and the steps that company boards take to engage and listen to employees, suppliers and other groups with an interest in corporate performance. The government has now finished analysing the feedback and has published its response, setting out a number of proposals.

These include the introduction of secondary legislation to:

  • require quoted companies to report annually on the rate of CEO pay compared to the average pay of their UK workforce and provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share- based incentive schemes
  • oblige all companies of significant size to explain how their directors comply with the requirements in section 172 (directors’ duties) of the Companies Act 2006, having regard to the interests of employees and others
  • require the UK’s largest companies, including privately-held businesses, to disclose their corporate governance arrangements in their directors’ report and on their website. This should include whether they follow any formal code except where they are already subject to an equivalent reporting requirement
  • invite the Investment Association to maintain a public register of listed companies that encounter opposition to pay awards from more than 20% of the shareholders, as well as a record of what these companies say they are doing to address shareholder concerns.

There are also plans to invite the Financial Reporting Council to include new provisions in the UK Corporate Governance Code:

  • giving remuneration committees a broader responsibility for overseeing pay and incentives across the company and explaining how these relate to executive pay incentives;
  • requiring companies to be more specific about the steps they should take to address significant shareholder dissent on executive pay (and other matters); and
  • requiring companies, on a comply-or-explain basis, to adopt one of three employee engagement mechanisms: a designated non- executive director, an employee advisory council or a director from the workforce.

The response also included proposals for the following business-led initiatives to be taken forward by business and professional bodies:

  • inviting the CBl, the Institute of Directors, the British Venture Capital Association and the lnstitute of Family Businesses to work with the FRC to develop a voluntary set of corporate governance principles for large, privately-held businesses, and
  • asking the lnvestment Association to implement its proposal to establish and maintain a public register of companies receiving significant shareholder votes against resolutions, including on executive pay.

In addition, the government has asked the FRC, the Financial Conduct Authority and the Insolvency Service to conclude new, or in some cases, revised letters of understanding with each other before the end of this year to ensure the most effective use of their existing powers to sanction directors and ensure the integrity of corporate governance reporting.

Following the recent collapse of Carillion and the previous BHS and Sports Direct scandals, only time will tell whether these measures are enough to address the systemic problem with UK corporate governance.

Sophie Martyn is a solicitor in our corporate & commercial team. With a background in science and data, she is naturally analytical and methodical in her approach. She has general corporate and commercial experience, with a particular interest in advising LLPs and start-up companies. Having previously worked in-house, Sophie is business-minded and makes sure she understands the commercial context in which she is providing legal advice to any individual client.

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