Business Secretary Greg Clark has set out the Government’s corporate governance reforms designed to enhance the public’s trust in business. Under new Government reforms to Boardroom accountability, for the first time all listed companies will have to publish pay ratios between CEOs and their average UK workers. This move is aimed at enhancing the transparency of big business to shareholders, employees and the public.
The Government’s bold package of corporate governance reforms includes the world’s first public register of listed companies where a fifth of investors have objected to executive annual pay packages. This new scheme will be set up in the Autumn and overseen by the Investment Association, a trade body that represents UK investment managers.
In the coming months, the Government will introduce new laws to require:
*around 900 listed companies to annually publish and justify the pay ratio between CEOs and their average UK workers
*all companies of a significant size to publicly explain how their directors take employees’ and shareholders’ interests into account
*all large companies to make their responsible business arrangements public
Last year, the Prime Minister made it clear that the behaviour of a small number of companies had damaged the public’s trust in big business. Theresa May duly set out proposals to improve transparency and accountability and afford employees a voice in the Boardroom.
Framework under continual review
Commenting on the reforms, Greg Clark said: “One of Britain’s biggest assets when it comes to competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business. Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world. We have maintained such a reputation by keeping our corporate governance framework under review. These reforms will build on our strong reputation and ensure that our largest companies are more transparent and accountable to their employees and shareholders.”
The Business Secretary will seek to ensure employees’ interests are better represented at the Boardroom level of listed companies. Clark will ask the Financial Reporting Council (FRC) – which sets high standards of governance through the UK’s Corporate Governance Code – to introduce a new requirement in the Code to achieve this.
Under the Code’s ‘comply or explain’ basis, firms would have to either assign a non-executive director to represent employees, create an Employee Advisory Council or nominate a director from the workforce.
The FRC will also be asked to work with the business community and the Government to develop a voluntary set of corporate governance principles for large private companies.
Stephen Haddrill, CEO of the FRC, explained: “The UK’s deserved reputation for good corporate governance, earned over the last 25 years, has underpinned the success of British business. How we develop the framework will be key to boosting competitiveness, transparency and integrity in business, and particularly so after Brexit. Successful and sustainable businesses are not just good for the economy. They also actively support wider society by providing jobs and helping to create prosperity.”
Haddrill continued: “The FRC is undertaking a fundamental review of the Corporate Governance Code. The Government’s feedback will help inform the development of our consultation later this year. Large private companies are integral to the UK’s economy as significant employers and supporters of communities and families. It’s right that we develop a set of corporate governance principles to enhance confidence that they act in the public interest.”
The Government intends to bring legislative reforms into effect by June 2018.
Response from the business community
Responding to the Government’s responsible business reforms, Stephen Martin (director general of the Institute of Directors) commented: “We welcome the pragmatic approach the Government is taking to improve how company Boards work. We’re particularly pleased that there will be a Code for large private businesses, as the principles of good governance should extend beyond the companies listed on the stock market. The Secretary of State is taking a sensible approach on giving workers a bigger say by allowing companies to choose the best way to implement the new rules. All directors are responsible for the whole company, so any with the specific remit to speak for employees must be adequately trained and aware of their responsibility to promote the long-term success of the business.”
In addition, Martin outlined: “Pay ratios will sharpen the awareness of Boards on the issue of remuneration, but they can be a crude measure. Companies will have to prepare themselves to explain how pay as a whole operates within their business and why executives are deemed to be worth their salary packages.”
Terry Scuoler, CEO of the EEF (the manufacturers’ organisation) observed: “UK manufacturers have a strong track record of good corporate governance and high standards of employment practice, with many examples of excellent employee engagement in firms up and down the land. These new proposals will build on these existing high standards, spreading Best Practice, improving transparency and ensuring greater consistency among the UK’s largest businesses. The reforms, which will undoubtedly accelerate improvements in corporate governance, are consistent with the UK’s industrial strategy and will aid the nation’s international competitiveness and attractiveness as a hub of global trade and investment.”
Paul Drechsler CBE, president of the Confederation of British Industry (CBI), outlined: “Good corporate governance is an essential ingredient of business performance and the bedrock of trust between business and society. We know that how companies act and behave determines the way people think about business. Companies take this seriously, and we look forward to working closely with the Government to ensure the UK maintains its reputation as a global leader in this field and as a primary location for international investment. The CBI is very clear that the unacceptable behaviour of a few firms doesn’t reflect the high standards and responsible behaviour of the majority of companies.”
Commenting on the new public register, Chris Cummings (CEO of the Investment Association) stated: “The creation of the public register on shareholder voting is an important step in increasing accountability and transparency of those listed companies that see significant shareholder rebellions during the AGM season. Our members, who manage the pensions of 75% of UK households and own over one third of the FTSE, believe that not all company Boards receiving big shareholder dissent are currently doing enough to address investor concerns. This public register will help to sharpen the focus on those who must do more, enabling our members to hold the country’s biggest businesses to account and leading to better-run companies. We look forward to working with Government to deliver the public register and aim to launch it this Autumn.”
Stefan Stern, director of the High Pay Centre Think Tank, concluded: “We want investors and Boards to have a more constructive and thoughtful conversation on executive pay. This sort of public disclosure should help. It’s a step in the right direction, providing greater transparency and focusing the public’s attention on those companies who ignore the concerns of their shareholders.”