UK corporate governance reforms: Pay ratio disclosure to be mandatory

The UK government is to require companies to publish pay ratios between chief executives – based on their total remuneration – and their average UK worker. This was among the actions outlined in the government’s response to its corporate governance green paper consultation which ended earlier this year.

The government said that the pay ratio information: “would provide a valuable and dynamic reference point to help companies demonstrate to employees and investors alike how executive remuneration relates to wider workforce pay at a given moment and over time.

The government also said that it was right “that a remuneration committee should be able and willing to explain why a particular ratio is right for that particular company, and to explain any changes to that ratio from year to year.”

This proposal was welcomed by the Pensions and Lifetime Savings Association (PLSA) which conducted research which found that 84% of pension funds are concerned about the pay gap in listed companies with 86% believing that executive pay in listed companies is too high.

UK corporate governance pay ratio disclosure

Luke Hilyard: pension funds welcome action on pay disclosure

Luke Hildyard, stewardship and corporate governance policy lead, PLSA, said the: “announcement that companies will need to disclose and explain the pay gap between their chief executive and ordinary workers is to be welcomed. For the average chief executive to receive 128 times the average pay of their staff is hard to justify and appears disproportionate in almost any circumstances.

“We are hopeful that today’s announcement is a concrete step forward which will see a more measured and transparent approach to executive pay.”

However, Hildyard expressed disappointment that, as had been trailed in previous media reports, the government had backed down from implementing tougher requirements for remuneration votes. Instead, the government has proposed that companies should demonstrate they are responding to the dissent by investors. The government said it would invite the Financial Reporting Council (FRC) to revise the UK’s corporate governance code to set out the steps that companies should take when they encounter significant shareholder opposition to executive pay and invite the Investment Association (IA) to implement a proposal it made in its response to the green paper.  The IA said it would establish a public register of listed companies encountering shareholder opposition of 20% or more to executive pay and other resolutions, along with a record of what these companies say they are doing to address concerns.

Chris Cummings chief executive of the IA said: “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 that receive big shareholder dissent are currently doing enough to address investor concerns. This public register will help sharpen the focus on the 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 later this autumn.”

The TUC’s Janet Willamson said the pay ratio rule would “go a short way to improving transparency, and could place some pressure on directors to consider whether soaring executive pay packages can really be justified.” However, overall the trade union body expressed disappointment in the government’s proposals, particularly in relation to gaining employee representation in the boardroom.

Frances O’Grady, TUC general secretary said: “This is a far cry from Theresa May’s promise to crackdown on corporate excess. It’s a feeble proposal, spelling business as usual for board rooms across Britain.

“The Prime Minister’s pledge to put workers on company boards has been watered down beyond all recognition. This now amounts to little more than a box-ticking exercise.”

The government said it would invite the FRC to consult on the development of a new corporate governance code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business.
As a part of developing this new principle, the government said it would invite the FRC to consider and consult on a specific code provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee
advisory council; or a director from the workforce.

Strengthening the corporate governance of private companies was also addressed in the green paper and following support for this the government said a more robust framework was needed for the largest private companies. The Government said it would invite the FRC to work with the Institute of Directors, the CBI, the Institute for Family Business, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for these companies under the chairmanship of a business figure with relevant experience.

Stephen Haddrill, CEO, FRC, said: “The UK’s deserved reputation for good corporate governance, earned over the last 25 years, has underpinned British business success. How we develop the framework will be key to boosting competitiveness, transparency and integrity in business particularly after Brexit. Successful and sustainable business are not just good for the economy, they support wider society by providing jobs and helping to create prosperity.

The FRC is undertaking a fundamental review of the UK Corporate Governance Code. The Government’s feedback will help inform the development our consultation later this year.

Large private companies are integral to the UK economy as significant employers and supporters of communities and families. It is right that we develop a set of corporate governance principles to enhance confidence that they act in the public interest.” 

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