The UK government’s widely trailed corporate governance green paper has focused, as expected, on executive pay and stakeholder representation at companies as well consulting on corporate governance rules for large privately owned companies. Manifest welcomed the consultation particularly the Government’s questions in relation to proxy advisors and other shareholder advisors who support investment managers and asset owners in their stewardship activities.

The government has provided a range of options to give shareholders more say on pay. Among the proposals suggested is that there could be binding votes for shareholders either on all executive pay packages or the variable pay elements of the pay award. It is suggesting that either this could be annual or apply to companies that have suffered high rates of opposition to their remuneration reports. Another option the government suggests is to be tougher on companies that lose the current advisory vote on pay – which could mean bringing forward the policy pay vote and requiring a 75% majority shareholder support for this or just requiring a binding vote the following year.

The government also suggests a strengthening of the corporate governance code, regulated by the Financial Reporting Council, in respect of executive pay.

The green paper outlines options to ensure investors use the powers they have to engage with companies and suggests that some of the measures contained in the Stewardship Code could be become mandatory requirements such as the disclosure of voting records. Ways to encourage engagement by retail investors, as well as institutional investors are also discussed.

The government suggests that the effectiveness of remuneration committees could be improved by requiring them to engage with stakeholders – such as shareholders and employees – when formulating pay policy.

Questions are asked about pay disclosure and improving transparency including on bonus targets. It is asked if the current total remuneration figure is working effectively and whether the disclosure of pay ratios between chief executives and employees should be published. The paper notes that the  Investment Association  recently updated its Principles of Remuneration to encourage companies to disclose pay ratios between the CEO and median employee, and the CEO and the executive team, to provide the context of the remuneration provided.

The government also asks how long-term incentive plans could  be better aligned with the long-term interests of quoted companies and shareholders.

With prime minister Theresa May appearing to soften her stance recently on worker representation in a speech to the CBI annual conference the government has provided a range of options as to how the interests of employees and other stakeholders could be represented within boards. These include the appointment of a non-executive director designated to ensure that the interests of stakeholders are taken into account at the board level.

In order to strengthen the corporate governance of private companies the government has suggested the possible adoption of the existing UK corporate governance code as far as it could be applied to non-listed companies or the development of a new corporate governance code specifically for private companies.

Business Secretary Greg Clark said: “The government is determined to make Britain one of the best places in the world to work, to invest and to do business, and part of that means continuing to have a framework of corporate governance that is admired across the world.”

Clark made a statement in the House of Commons and said that one of the country’s strengths  was its record on corporate governance and said there was no conflict between corporate governance and profitability.

The government ensured that the green paper was welcomed by the UK’s major business and investment groups – including the Pensions and Lifetime Savings Association – as well as the Financial Reporting Council. This green paper comes as the Business, Energy and Industry Strategy (BEIS) select committee holds an inquiry into corporate governance. The FRC said it had  already made recommendations to this inquiry which include company directors reporting on their responsibilities under section 172 of the Companies Act 2006, developing the role of the remuneration committee and what happens when there are significant votes against the remuneration report, and ensuring that boards take account of a more diverse range of views in their decision-making. The regulator said it stood ready to develop and implement these proposals to help support a strong economy and meet the needs of wider society.

Simon Walker, Director General at the Institute of Directors, said: “We are very pleased the Government is kicking off a wide debate on how to ensure UK corporate governance is up to scratch. Ministers are taking a genuinely consultative approach, putting forward a pragmatic list of options to increase shareholder input in directors’ pay and give employees a greater voice in the boardroom, both of which can help towards the long-term success of companies.

“The most important element of the proposals is greater scrutiny for unlisted companies, which is long overdue. There are around 2,500 private firms which employ at least 1,000 people, and the damage that occurs when they are poorly governed can be substantial, as we saw with the collapse of BHS.”

Josh Hardie, CBI Deputy Director-General, said: “The UK’s approach to corporate governance is respected around the world. British firms know that great relationships with staff, customers and communities is the cornerstone of success. However, businesses agree that legitimate concerns exist and are determined that the unacceptable behaviour of the few should not tarnish the effectiveness of the many. So it is right that approaches to governance continue to evolve to support a modern, fair economy. We look forward to working with Government to finding solutions that enhance the UK’s governance framework.”

Last Updated: 4 December 2016