74: Government publishes proposals for corporate governance reform

The Department for Business, Energy and Industrial Strategy has published the Government’s response to the Green Paper consultation on corporate governance reform.

This contains proposals for changes in the areas of executive pay; strengthening the employee, customer and supplier voice; and corporate governance in large privately-held businesses. However, none of the proposals will require primary legislation, and many will be left to the Financial Reporting Council (FRC) and other key organisations to implement. Most of the reforms are expected to come into force by June 2018.

Key proposals include:

• invite the FRC to revise the UK Corporate Governance Code (the Code) to give remuneration committees a broader responsibility for overseeing pay and incentives across their company; require them to engage with the wider workforce to explain how executive remuneration aligns with wider company pay; and extend minimum holding periods for executive share awards from three to five years;
• introduce secondary legislation to require a clearer explanation in remuneration policies of the range of potential outcomes for long-term incentive plans;
• introduce secondary legislation to require quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce. Details of the calculations to be used have not yet been published;
• invite the FRC to revise the Code to be more specific about the steps that listed companies should take when they encounter significant shareholder opposition to executive pay;
• invite the Investment Association to maintain a public register of listed companies encountering shareholder opposition of 20% or more to pay awards;
• invite the FRC to consult on a new requirement for premium listed companies to adopt one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce;
• develop a voluntary set of corporate governance principles for large private companies; and
• require public and large private companies to explain how their directors have complied with the duty to promote the success of the company for the benefit of its members under section 172 of the Companies Act 2006. This duty requires directors to have regard to employees’ interests and the need to foster business relationships with suppliers and customers. The Government will also ask the GC100 to develop guidance on how directors should carry out this duty in practice.