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Article

Good Governance

Change is afoot

12 Dec 2017

While many commentators assumed that corporate governance had dropped off the government’s agenda given the more pressing issue of exiting the European Union, changes to the UK corporate governance framework have been afoot. 

The impetus for this has primarily come from the government’s response to its green paper on corporate governance reform. Included in the reforms (listed below) was the provision for the FRC to undertake a review of the existing UK Corporate Governance Code as well as creating a new bespoke set of voluntary principles for large private companies. The IoD Corporate Governance team is closely involved in both of these projects to ensure the voice of IoD members is represented. In the meantime we have produced this brief overview of some of the changes:

Corporate Governance Reform: Government response:

In November 2016 the government published a consultation into possible reforms to the UK’s corporate governance framework. Alongside this the Business, Energy, Innovation and Skills committee heard evidence on the same topic. The IoD in its role representing UK directors submitted suggestions and evidence to both and our submissions were featured in the subsequent publications.

Following the closure of the consultation period the government subsequently published their response in August 2017 putting forward the following reforms to the UK Corporate Governance framework. These are summarised below and the full paper can be found here.

Executive Pay

  • Task the Financial Reporting Council to revise the UK Corporate Governance Code to:
  • Be more specific about the steps which premium listed companies should take when they encounter significant shareholder opposition to executive pay policies and awards.
  • Broaden the responsibility of remuneration committees to include overseeing pay and incentives across the whole company. In addition require the remuneration committee to engage with the wider workforce on how executive remuneration aligns with wider company pay policy (using pay ratios to help explain the approach where appropriate).
  • Extend the recommended minimum vesting and post-vesting holding period for executive share awards from 3-5 years to encourage companies to focus on longer-term outcomes in setting pay.
  • Introduction of secondary legislation to require quoted companies to:
    • Report the annual pay ratio between CEO and the average pay of their UK workforce. Included in this will be the provision to provide a narrative explaining any annual changes to the ratio.
    • Provide a clearer explanation in remuneration policies on the range of potential outcomes from complex, share-based incentive schemes.

  • Task the Investment Association to create a public register of listed companies receiving 20% or more opposition to pay awards. (Note – the Investment Association have widened this to include any vote against a resolution of 20% or more).
  • The Government has also committed itself to examine the use of share buybacks to ensure they are being used appropriately and not to inflate executive pay. 

    Strengthening the stakeholder voice

    • Introduce secondary legislation which would require all companies of significant size (public and private) to explain how their director comply with section 172 of the Companies Act (see below)

      172 Duty to promote the success of the company

      (1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

      (a)the likely consequences of any decision in the long term,

      (b)the interests of the company's employees,

      (c)the need to foster the company's business relationships with suppliers, customers and others,

      (d)the impact of the company's operations on the community and the environment,

      (e)the desirability of the company maintaining a reputation for high standards of business conduct, and

      (f)the need to act fairly as between members of the company.

      (2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

      (3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

    • Task the FRC to consult on the development of a new UK Corporate Governance Code principle establishing the importance of strengthening the voice of employee and other non-shareholder interests at board level. Part of this will include a specific provision requiring premium listed companies to comply or explain with one of three employee engagement mechanisms:
      • A designated ‘employee’ non-executive director.
      • Creating a formal employee advisory council.
      • A workforce director.

    • Encourage industry-led solutions by asking ICSA (the Institute of Chartered Secretaries and Administrators) and the Investment Association to complete their joint guidance on stakeholder engagement. Note – this has now been published and is available here.
    • Ask the GC100 (FTSE100 General Secretaries) to publish guidance on the practical interpretation of section 172.

    Corporate governance in large privately-held businesses

    • Task the FRC to convene a committee to develop a set of voluntary corporate governance principles for large private companies. Chaired by a prominent business figure, suggested organisations to include in the committee are; the IoD, the CBI, the IFB and the BCVA.

    • Introduce secondary legislation to require companies of a certain size to disclose their corporate governance arrangements in their Directors’ Reports and on their website. Companies which fall under an existing corporate governance reporting requirement are excluded from this.

    Implementation:

    -The FRC has begun its consultation on the UK Corporate Governance Code and the IoD corporate governance team will be contributing towards this. Details of the consultation can be found here.

    -The FRC has convened a committee to create a set of voluntary corporate governance principles for large private companies - the IoD is sitting on this.

    -The Investment Association has sent out letters to companies which saw at least 20% of shareholders oppose resolutions at this year's annual general meeting. The register of companies is expected to be published by the end of the year.

    - The Government intends to put before Parliament draft secondary legislation, where required, before March 2018. Where necessary, there will be consultation on the detail of the secondary legislation.




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