The Way Forward for UK Corporate Governance

In a previous blog, I discussed the Department for Business, Energy & Industrial Strategy (BEIS) Green Paper on Corporate Governance Reform issued in November 2016. I mentioned that there were 14 Green Paper questions with six relating to executive pay, three to strengthening the employee, customer, and wider stakeholder voice, and five relating to corporate governance in large, privately-held businesses. The consultation closed on 17th February 2017 and subsequently the BEIS has published a report which details its recommendations and conclusions based on the consultation, available at: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/702/70209.htm

It is worth noting that the Report continues to support the ‘comply or explain’ basis of UK corporate governance. However the Report does propose a number of reforms aimed at ensuring that directors take their duties more seriously and comply with both the law and the UK Corporate Governance Code. These reforms include ‘requirements relating to more specific and accurate reporting, better engagement between boards and shareholders, and more accountable non-executive directors. Crucially, to combat what are currently very weak enforcement mechanisms, we recommend a wide expansion in the role and powers of the Financial Reporting Council, to enable it to call out poor practice and engage with companies to improve performance.’

 

 Importance of company culture

Culture is seen as an important aspect ‘the central tenets of good corporate governance should be embedded in the culture of all companies, so that it permeates activity at every level and in every sphere. It is cultural evolution, in line with the spirit of the Cadbury Report, that should be the long-term goal of Government, investors and companies.’

 

Promoting good corporate governance

There are a number of recommendations aimed at promoting good corporate governance.  These include, inter alia, that directors should provide more informative narrative reporting in relation to their duties under Section 172 of the Companies Act 2006 including explaining how they have considered each of the different stakeholder interests, such as employees, customers and suppliers and how this has been reflected in the company’s financial decisions; that the Financial Reporting Council (FRC) should work with companies to develop a new corporate governance rating which would publicise ‘examples of good and bad practice in an easy to digest red, yellow and green assessment; companies would be obliged to include reference to this rating in their annual reports’; the Financial Reporting Council should be given additional powers to engage and hold company directors to account in respect of their duties. Enhancing the dialogue between boards and investors is discussed as is the relationship between the board and the company’s stakeholders.

 

Private companies

A new governance Code should be developed for the largest private companies which are subject to weaker reporting requirements. The new Code should include a complaint mechanism so that any complaints raised about compliance with the Code could be followed up with the individual companies concerned.

 

Pay

A simpler pay structure is recommended, the constituents being salary, bonus relating to stretching targets, and payment by means of equity over the long-term. Complex long-term incentive plans which may have unintended consequences would be abolished. An option for employee representation on remuneration committees would be included in the Code, furthermore the Report states that it expects leading companies to adopt this approach.

 

Composition of boards

Companies should recruit executive and non-executive directors from the widest possible base.

The Report supports the recommendations of recent reviews on gender and ethnic diversity but recommends further measures ‘to ensure that diversity is promoted at all stages of careers to broaden the pool of talent at the executive level. To this end, the Government should set a target that from May 2020 at least half of all new appointments to senior and executive management level positions in the FTSE350 and all listed companies should be women.’ Overall, the Report’s recommendations are aimed at permanently ingraining ‘the values and behaviours of excellent corporate governance into the culture of British business.’

 

Consultation responses

Originally it was thought that the responses to the consultation would be made available in collated format and the anonymity of individual responses would be retained. However, individual responses to the consultation are listed at: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/702/70214.htm

and individual responses can be viewed at: http://www.parliament.uk/business/committees/committees-a-z/commons-select/business-energy-industrial-strategy/inquiries/parliament-2015/corporate-governance-inquiry/publications/

 

Chris Mallin

July 2017

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