BEIS responds to Green Paper on Corporate Governance reform

The Department for Business, Energy & Industrial Strategy has published the Government’s response to its Green Paper on corporate governance reform.  

Executive Pay 

Listed companies will be required to report the pay ratio between their chief executive and average UK worker on an annual basis, together with an explanation for any change to that ratio from year to year and how the ratio relates to pay and conditions across the wider workforce.  

The Government has decided against introducing an annual binding shareholder vote on executive pay.  Instead it will invite the Investment Association to maintain a new public register of listed companies where 20% or more of shareholders have objected to executive pay awards.  It will also invite the Financial Reporting Council (FRC) to consult on changes to the UK Corporate Governance Code around steps that companies should take when they encounter significant opposition to executive pay.  

The Government will also consult on other changes to the UK Corporate Governance Code, including giving remuneration committees greater responsibility for demonstrating how pay and incentives align across the company and to explain to the workforce how decisions on executive pay reflect wider pay policy.  Remuneration policies will also have to include clearer explanations around the use of complex, share-based incentives.   

Strengthening employee, customer and wider stakeholder voice 

The Government has asked the FRC to consider and consult upon a requirement that premium listed companies adopt one of the following three employee engagement mechanisms on a “comply or explain” basis:

• Nominating a non-executive director to represent employees
• Creating a formal employee advisory council
• Nominating a director from the workforce. 

Private and public companies of a significant size will also be required to explain how their directors comply with the requirement in s 172 Companies Act 2006 to consider the interests of stakeholders (such as employees, customers and suppliers) in their decision-making process. 

Corporate governance in large private companies 

The Government will commission the FRC to work with various industry bodies to develop a voluntary set of corporate governance principles for large private companies.

All companies of a significant size (2,000 or more employees is suggested) will be required to disclose their corporate governance arrangements in the directors’ report and on their website. The Government will consider whether a similar requirement should be extended to LLPs.    

The Government has indicated that it currently intends to bring the reforms into effect by June 2018 to apply to company reporting years applying on or after that date.