UK Corporate Governance Reform: Has Theresa May Delivered?
With all the media frenzy over whether Theresa May has delivered on her (perhaps overly ambitious) promises on corporate governance reform, it is easy to miss the substance of what the Government has just announced.
Although there are no bold new initiatives, there are plenty of changes that are designed to deliver nudges to corporate behavior on executive pay, representation in the boardroom and other issues. There are even one or two that play to the crowd in general and the media in particular.
Cynics might write this off as more of the same, with the result of one consultation exercise spawning a plethora of new consultations. However, we think that there is more to it and that it is worth taking the time read through the list of action points identified by the Government.
Executive pay in quoted companies
The Financial Reporting Council, the guardian of the UK Corporate Governance Code (the Code), will be asked to take the following actions in respect of the Code:
add more detail on how companies should react where there has been “significant shareholder opposition” displayed in votes on executive pay;
consult on giving remuneration committees a wider role in aligning executive pay with pay in the wider workforce and in explaining how executive pay decisions affect wider pay policy;
consult on increasing the total vesting/performance/holding period for share-based remuneration from 3 to 5 years;
consult on requiring all new remuneration committee chairs to have at least 12 months experience on a remuneration committee; and
consult on the possible inclusion of new principles or detailed guidance on share-based remuneration.
All these changes would come under the “comply or explain” regime under the Code. The Investment Association will be asked to keep a public register of all instances where companies suffer a 20% vote against their remuneration resolutions. Smaller quoted companies can no longer hope to disappear under the media radar if they suffer a 20% shareholder revolt on pay issues.
The Government will also make some legislative changes requiring:
annual disclosure of the ratio between CEO pay and the average remuneration of the UK workforce (likely to be based around the existing “single figure” disclosure for CEO pay); and
more detailed disclosure on the possible outcomes of complex share-based remuneration.
The Government will also be commissioning work to examine the significance of share buybacks, including their effect on satisfaction of executive pay performance targets.
Strengthening employee and other stakeholder voices in the boardroom
There are a variety of changes here, including what is left of Theresa May’s bold promise of employee representation on the board.
The FRC will consult on adding a Code requirement that quoted companies adopt one of three models for employee representation in the boardroom:
a non-executive director taking on this role;
establishing a formal employee advisory council; or
appointing an employee director.
At least in the short-term, most companies are likely to opt for the non-executive director route. Even that will involve many executive directors having to acquire new skills in a relatively short time, although the need for those skills may bring in new blood to the boardroom (with the knock-on benefit of increasing board diversity). Fortunately, help is on the way, with the Government giving support to the ICSA and Investment Association’s work to produce guidance on employee engagement.
New legislation will force large companies (both quoted and unquoted) to give greater explanations on how their boards comply with the general Companies Act requirement to promote the success of the company having regard to matters including the interests of the company’s employees and wider stakeholder interests. Again, help is on its way with the Government backing the GC100’s project to provide advice and guidance on the practical implications of the existing requirements under s172 of the Companies Act.
Last but not least in this section, the FRC is to consult on introducing a new Code principle on strengthening the voice of employees and other non-shareholder interests. This should dovetail with the work of both the ICSA and the Investment Association in developing practical guidance on boardroom engagement.
Larger private companies
This is the continuing fallout from the BHS pension controversy. The FRC (who are going to be very busy, by the look of it) will work with other organisations such as the IoD and CBI under the leadership of a prominent business figure to create a new voluntary set of corporate governance principles for large private companies.
The Government will also introduce new compulsory corporate governance disclosure requirements for all large UK companies (expected to be those with over 2,000 employees) which are not already covered by the existing legal disclosure regimes.
For those with an eye for detail and an interest in wider governance issues, there are also sections on strengthening the FRC’s powers (or at least an explanation of how and why they are not being strengthened) and boardroom ethnic, gender and social diversity (which was not covered by the original consultation but which has been thrown in for good measure).
So, where does all that leave us? The answer, on executive remuneration at least, may be found in the descriptions of the consultation responses (ours amongst them), in which a number of respondents were of the view that the existing regime already gives shareholders the tools they need to reign in executive pay so that all that is needed is fine tuning to back them in their efforts. We can now expect a steady stream of additional announcements that will fill out the detail on the new legislation, Code amendments and consultations.
Finally, more of a hope than a prediction. We already have regular headlines based on “single figure” CEO pay disclosures which make little effort to explain what that figure really means. Those news stories are now going to be joined by media reporting of CEO pay ratios. These ratios are almost meaningless without their context so we can only hope that the reporting will at least try to give some acknowledgement of what lies behind the raw figures. What we can be sure of is that companies will be very keen to make sure that reporters will easily find the detail behind the ratio if they go looking for it.