Business Secretary Greg Clark has today set out the government's corporate governance reforms to ‘enhance the public's trust in business’. The government intends to bring legislative reforms into effect by June 2018. The proposals contain three key reforms:
1. Some 900 listed companies will be required to ‘publish and justify’ the pay ratio between chief executives and their average UK worker.
Clark said:
‘Today’s reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.’
2. All listed companies with significant shareholder opposition to executive pay packages will have their names published on a new public register.
‘These will include 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.’
3. New measures will seek to ensure ‘employee voice is heard in the boardroom’.
‘The Business Secretary will seek to ensure employees’ interests are better represented at board level of listed companies. He will ask the Financial Reporting Council (FRC), which sets high standards of governance through the UK 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 Martin, Director General:
‘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.
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 in their business operates, and why executives are worth their packages.’
Terry Scuoler, Chief Executive:
‘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 proposals will build on these existing high standards, spreading best practice, improving transparency and ensuring greater consistency amongst the UK’s largest businesses. The reforms, which will accelerate improvements in corporate governance, are consistent with the UK’s industrial strategy and will aid international competiveness and attractiveness as a hub of global trade and investment.’
Paul Drechsler CBE, President:
On pay ratios . . .
‘If pay ratios include meaningful context, they could prove a useful addition to the debate about executive pay.’
On a public register . . .
‘Providing shareholders with a “say on pay” has been an effective tool and a public register will help to shine a light on the small minority of cases that warrant greater attention.’
On ‘worker representation’ . . .
‘As the CBI has long advocated, firms will welcome the flexibility to determine which model works best for them when incorporating employees’ views. Fostering good employee relations is vital to successful business and critical to improving the perception of business, as our research has shown.’
Stefan Stern, Director:
‘We want investors and boards to have a more constructive and more thoughtful conversation on executive pay, and this sort of public disclosure should help. This is 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.’
Frances O'Grady, General Secretary:
‘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 boardrooms 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. Firms will rightly have to publish the pay gap between bosses and ordinary workers, but we are concerned that the government’s calculations will take the focus off the lowest-paid.’
Ben Willmott, Head of Public Policy:
‘The government’s Corporate Governance Reforms are a welcome move towards building greater trust and fairness in business. While today’s reforms may not go as far originally suggested a year ago, they nonetheless improve transparency around top pay and boost employee voice at board level.’
On pay ratios . . .
'The CIPD has been calling for the publication of pay ratio between CEOs and their workforce since 2015 so we welcome the government’s plans to introduce new laws to address this. The latest CIPD/High Pay Centre research found that for every pound their average worker is paid, a FTSE 100 CEO receives £129. Our research has also shown that high levels of CEO pay can demotivate the wider workforce, which can have a wider impact on engagement and productivity, so it’s right that this is addressed through greater transparency and accountability.
On a public register . . .
‘We also welcome moves to publicly name companies that encounter significant shareholder opposition to executive pay packages. Executive pay must be clearly linked to business performance and shareholders have a key role to play in holding executives to account on this.’
On ‘worker representation’ . . .
‘It is particularly encouraging to see that the government’s reform package will require all large companies’ directors to explain how they are taking not just shareholder but also employee interests into account. Good corporate governance must start with the workforce, who play a fundamental role in creating a business’s success, as well as shareholders and the wider community. The requirement to ensure that employees’ interests are better represented at board level of listed companies is a positive step. Evidence from numerous corporate scandals shows that there was knowledge of issues that were undermining corporate governance but too often people felt they could not, or were afraid of, speaking out. There is no magic bullet to creating meaningful employee voice but the options put forward by government are broadly positive and should encourage greater awareness and discussion of workforce matters at board level.’
Patrick Woodman, Head of Research:
‘We welcome the government’s plans to introduce transparency in the reporting of executive pay. We need to see fairer ratios between CEO and average pay, as well as stronger remuneration committees who make sure that executive pay packages are based on long-term evaluation of performance. High-profile cases of runaway executive pay and “rewards for failure” have broken down trust in business. Greater transparency about executive pay will help drive change.’
Rupal Patel, Partner in EY’s UK People Advisory Services team:
‘We welcome the government’s decision not to proceed with the proposal in relation to an annual binding vote on pay. The use of negative votes by shareholders, which we have seen since the introduction of the 2013 regulations, demonstrates that the reforms are working. It shows that shareholders have been given the right information, have the power to act on it, are engaged and are holding companies to account.’
On pay ratios . . .
‘The introduction of pay ratios has been widely supported by the investor community and may provide them with some additional information, but we particularly welcome the increased consideration of worker’s pay in the context of executive pay. In our view, there should be an equal, or arguably greater, focus on the bottom quartile and how much a company’s lowest paid workers are earning.’
On ‘worker representation’ . . .
‘We welcome the government’s decision to allow companies to develop the most appropriate ways to engage with their stakeholders rather than mandating a fixed approach. All companies are different and boards will have preferred methods for gathering input from their stakeholders.’
On additional reporting for large private companies . . .
Mala Shah-Coulon, Executive Director in EY’s UK Corporate Governance team, adds:
‘The government’s proposals include a new reporting requirement for large companies with over 2000 employees to disclose their corporate governance arrangements in their Directors’ Report and on their website, including whether they follow any formal code. Increased transparency is a positive development and the old adage, “what gets measured gets done” does sometimes ring true. However, reporting is not a panacea to cure governance issues – the foundations are based in companies instilling the right behaviours, culture and processes, with reporting used as an output. It’s important that any additional reporting requirements aren’t reduced to a box ticking exercise. The government has also invited the FRC to work with the CBI, Institute of Directors and others to draft voluntary governance principles for large private companies. We encourage these organisations to draw on what exists elsewhere in this space, as private businesses will ultimately be looking for simplicity.’
On transitional arrangements . . .
Mala Shah-Coulon adds:
‘The government’s intention is to bring the reforms into effect by June 2018. Where necessary, transitional arrangements should be considered by all concerned – particularly as most companies are already grappling with the impact of domestic and global macroeconomic uncertainty. Companies will need to review and amend their existing governance processes and that will take time to implement.’