The 17th of February marked the closing of the government’s green paper on corporate governance reform. While the UK is already an established international leader in corporate governance, the government seeks to extend that leadership and support companies to make better decisions, thereby combining high standards of governance, with low burdens and flexibility. As a result of these changes, the government hopes to enhance the competitiveness of the UK economy.
So what are the suggested reforms and how will they impact UK commerce?
1) Directors’ pay
There is a widespread public perception that directors’ pay has become increasingly disconnected from both the pay of ordinary workers and the underlying long-term performance of companies. Directors’ pay has been deemed “opaque to the outsider” and “difficult to justify.” In the introduction to the paper, Theresa May makes it clear that key groups, such as employees and consumers, should be given a greater voice in the boardroom and that directors’ pay should be properly aligned to long-term performance.
In 2013, the executive pay reforms required a binding vote, at least every three years, on remuneration policy. The government is now seeking views on whether these reforms require further refinement, specifically:
- Shareholder voting, eg whether all or certain elements of directors’ pay packages should be subject to a binding vote. This may prove somewhat problematic for business, who may not able to award pay before shareholder consent has been obtained.
- Shareholder engagement, eg whether a senior “shareholder” committee should be established to engage with executive remuneration arrangements. The role of the committee would be to consult shareholders and the wider company workforce in advance of preparing its pay policy.
- Greater transparency, eg whether there should be disclosure of bonus targets.
2) Strengthening the stakeholder voice
This section of the consultation focuses on strengthening the stakeholder (eg employees, customer and suppliers) voice at board level. The government has suggested the:
- Creation of advisory panels, through which, the board could seek views on particular issues.
- Designation of non-executive directors to ensure that the voices of interested groups, eg employees, is being heard at board level.
- Appointment of individual stakeholder representatives to boards.
- Strengthening of reporting requirements. Currently, companies have to prepare strategic reports enabling shareholders to assess director performance, however, there are no details on how this should be done. Stronger reporting could promote greater confidence in boardroom decisions.
3) Corporate governance in large privately held businesses
The government is interested in finding out how large, privately-held businesses are applying corporate governance principles to improve the way they run. It has suggested:
- Applying enhanced standards of corporate governance more widely, eg extending the UK Corporate Governance Code to these types of companies.
- Applying reporting standards more consistently, eg should non-financial reporting standards be applied on the size of a company, rather than whether it is quoted or not?
The consultation is clearly part of a wider effort to boost the public’s trust in business. It focuses on the need to take stakeholders into account (which of course, is valuable), however, the key to success lies in ensuring any changes are delivered in a sustainable manner and over the long term. If the government adopts this approach, with corporate governance at the heart, there’s a much higher likelihood that trust in businesses will improve.