The Government's decision to launch a consultation on corporate governance is a sign of its continued commitment to review the way UK businesses are run. It is also a clear statement that the Government wants to increase public trust in businesses, particularly in the wake of recent high profile cases such as BHS and Sports Direct. The Green Paper identifies some current issues and suggests some options for reform. There is no preferred option at this stage but the aim is to open a dialogue on the proposals. The Financial Reporting Council, the Investment Association and the Institute of Directors have all welcomed the publication of the Green Paper.

Theresa May, Prime Minister said:

"This Green Paper focuses on ensuring that executive pay is properly aligned to long-term performance, giving greater voice to employees and consumers in the boardroom, and raising the bar for governance standards in the largest privately-held companies."

Executive pay for quoted companies

Executive pay is a key area of concern according to the Green Paper. Views are sought on the following areas:

  • shareholder voting and other rights. Quoted companies are already required to subject their pay policy to a binding vote every three years and their annual pay awards to an annual advisory vote. The Green Paper considers options for increasing shareholder influence in this area
  • shareholder engagement on pay
  • the role of the remuneration committee
  • transparency in executive pay
  • long-term pay incentives.

Options being considered include:

  • making all or some elements of the executive pay package subject to a binding vote and introducing stronger consequences for a company losing its annual advisory vote on the remuneration report 
  • ways of encouraging shareholder engagement on pay such as mandatory disclosures of fund managers' voting records at AGMs and the extent to which they have made use of proxy voting
  • imposing a consultation obligation on remuneration committees when preparing the pay policy
  • the much discussed pay ratio reporting which would compare CEO pay to pay in the wider company workforce
  • simplifying long-term incentive plans.

Strengthening the voices of employees, customers and other stakeholders

Section 172 of the Companies Act 2006 already requires companies to consider the interests of other stakeholders (such as employees, suppliers and customers) in their decision making process. Views are now being sought on how to strengthen the voice of employees, customers and other stakeholders in the boardroom. Other stakeholders could include suppliers, pension fund beneficiaries and the wider society.

However, there is no suggestion that employees or other stakeholders would be directly appointed to company boards or that a dual board structure should be created echoing the comments of Theresa May at a recent CBI conference. This would appear to be a watering down of the Government's original proposal to have employee and customer representatives on boards.

The consultation also proposes options such as stakeholder advisory panels and designating non-executive directors with responsibility for ensuring other stakeholder voices are heard at board level.

Alternatively, a disclosure obligation could be imposed to clarify how stakeholder interests have been taken into account in board decision-making. The Green Paper considers whether the stakeholder engagement options should be subject to an employee size threshold or some other threshold.

Corporate governance of the UK's largest private companies

Views are being sought on whether large private companies – where they are of similar size and economic significance to public companies - should adhere to the UK Corporate Governance Code, a set of principles of good corporate governance aimed at companies listed on the London Stock Exchange.

Alternatively, a new tailored code could be developed by bodies such as the Financial Reporting Council or the Institute of Directors. Businesses can express their views on the size threshold that should apply and whether it should be a legal requirement or a voluntary approach.

What next?

Corporate governance continues to be a rapidly evolving area and the publication of the Green Paper is the latest in a series of announcements. The Green Paper encourages a dialogue with businesses, investors and the public. If you would like to join the conversation, comments should be submitted by 17 February 2017. For more on the other corporate governance changes being proposed, please see our previous article: Corporate governance... further changes on the way? Further updates will follow.