Corporate

The House of Commons Business, Energy and Industrial Strategy Committee recently published its report on corporate governance.

This BEIS report is not to be confused with the Green Paper that the Government published on Corporate Governance in November 2016.

There is though some overlap between the BEIS report and the Government’s Green Paper especially with respect to corporate themes such as executive pay, private companies and workers on boards.

However, the BEIS report also looks at the broader aspects of corporate governance, such as the existing legal and regulatory framework under the Companies Act 2006 and diversity on boards.

Indeed, whilst the BEIS report recognises the strength of corporate governance in the UK, it does not believe that a radical overhaul of the current framework is necessary.

Financial Reporting Council powers

Instead, the BEIS report proposes that there is scope for significant improvement by expanding the role and powers of the Financial Reporting Council to engage with and hold to account, company directors in respect of their duties.

The report makes a number of recommendations to achieve this, including:

  • Amending the UK Corporate Governance Code (“Code”) to require informative narrative reporting on the fulfilment of duties under section 172 (duty to promote the success of the Company) of the Companies Act 2006 by directors. This includes a requirement for boards to explain how they have considered each of the different stakeholder interests and how this has been reflected in financial decisions.
  • A rating system be developed that will publicise examples of good and bad corporate governance practice by companies.
  • A voluntary code of corporate governance be drawn up for large private companies. Compliance with this code will be overseen and reported on by a new body.

Executive pay

Concluding that “high and unwarranted executive pay is an issue that needs to be addressed for the benefit of society as a whole”, the report proposed the following reforms in respect of executive pay (many of which relate to remuneration for executives in quoted companies):

  • Companies should make it their policy to align bonuses with broader corporate responsibilities and company objectives and take steps to ensure they are genuinely stretching.
  • Long-term incentive plans (LTIPs) should be phased out as soon as possible.
  • Long-term incentivisation should be promoted through the use of “deferred stock options” – free share awards with no performance conditions that vest over a period of at least five years.
  • That the Code be amended to include a requirement for a binding vote on executive pay awards the following year in the event of there being a vote against such a vote of over 25% of votes cast.
  • That the Code should be amended to provide for employee representation on the Remuneration Committees.

In many respects the recommendations contained in the BEIS report are consistent with some of the big themes currently swirling around in the context of corporate governance and executive pay, namely: accountability, fairness, responsibility, transparency and citizenship.

Indeed, Theresa May has set her stall out as promoting the concept of shared society and ending crony capitalism.

If Theresa May is returned to power you can be sure that the above themes will become law or codified in some form or another and will apply to publicly quoted and large private companies.

 

Nigel Watson

Nigel Watson

Partner at Brodies LLP
Nigel heads our Employee Benefits practice and advises companies and owner managed businesses on everything to do with employee share ownership, tax effective reward structures and remuneration design and execution.
Nigel Watson