UK: Government sets out corporate governance reforms

The Department for Business, Energy and Industrial Strategy (BEIS) has published its response paper on UK corporate governance reform.

The response paper follows the green paper which it published in November 2016 seeking views on reform measures.

The response paper sets out twelve key actions for reform. The actions cover the three specific aspects of corporate governance discussed in the green paper, which are executive pay; strengthening the employee, customer and supplier voice; and corporate governance in large, privately-held businesses. The response paper also discusses some other issues raised by respondents to the green paper.

The key proposals include:

• Pay ratio – Quoted companies will have to report annually on the ratio of CEO pay to the average pay of their UK workforce, along with a narrative explaining changes to that ratio from year to year and how the ratio relates to pay and conditions across the wider workforce.
• Register of companies encountering shareholder opposition on pay – The Government has asked the Investment Association to maintain a public register of listed companies encountering shareholder opposition of 20% or more to executive pay, including a record of what those companies are doing to address concerns. The Investment Association has announced that it intends to launch the register by the end of 2017.
• Report on stakeholder issues – The Government will require public and private companies of a significant size (possibly those with 1,000 or more employees) to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to employee interests and to fostering relationships with suppliers, customers and others.
• Stakeholder voice in the boardroom – The FRC is invited to consult on a new Governance Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level. This would include consulting on a specific provision requiring premium listed companies to adopt, on a comply or explain basis, one of three employee engagement mechanisms: (i) a designated non-executive director; (ii) a formal employee advisory council; or (iii) a director from the workforce.
• Private company governance principles – The Government will invite the FRC to work with the Institute of Directors, the CBI, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for large private companies.  It will also introduce secondary legislation to require all companies of a significant size (likely to be those with more than 2,000 employees) to disclose, on a comply or explain basis, their corporate governance arrangements in their Directors' Report and on their website, including whether they follow any formal code.

The Government intends the reforms to be effective by June 2018 and to apply to company reporting years commencing on or after that date. It intends to lay the necessary draft legislation before Parliament by March 2018.

No new primary legislation is proposed. Instead, the proposed actions outlined in the response paper are to be delivered through secondary legislation, changes to the UK Corporate Governance Code and other industry-led initiatives. The Financial Reporting Council (FRC) has issued an announcement welcoming the response paper and noting that the Government feedback will help inform the development of its fundamental review of the UK Corporate Governance Code, announced earlier this year, which it will launch in late Autumn 2017.

We have published a detailed briefing on the response paper available to clients on request.

The response paper is available on the gov.uk website.