Understanding the changes to the UK Corporate Governance code

The UK government has recently announced a number of proposals that will reform the corporate governance of publicly traded companies and privately traded companies. These reforms will come into effect by June 2018 and will cover three aspects of corporate governance; executive pay, strengthening the employee, customer and supplier voice, and corporate governance in large privately held businesses.

Executive Pay

Under current legislation, quoted companies are required to submit a director’s remuneration policy to a binding shareholder to vote at least every three years. The three key plans the government intends to implement are:

Secondary legislation requiring quoted companies to:
• Report annually the ratio of CEO pay to the average pay of their UK workforce along with a narrative explaining changes in the ratio year to year and how the ratio relates in the context of pay conditions across the wider workforce.
• Provide a clear explanation in remuneration policies of a range of potential outcomes from complex, share based incentive schemes.

Invite the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code:
• To be more specific about the steps that premium listed companies should take when they encounter significant shareholder opposition to executive pay policies and award (and other matters).
• Give remuneration committees a broader responsibility for overseeing pay and incentives across their company.
• Extend the recommended minimum vesting and post-vesting holding period for executive share awards from three to 5 years.

Invite the Investment Association to implement a proposal made to maintain a public register of listed encountering shareholder opposition to pay award of 20% or more, along with a record of what these companies say they are doing to address shareholder concerns.

Strengthening the employee, customer and supplier voice

Here the government sets out another three key proposals for reform to strengthen the voice of employees, customers and wider stakeholders in boardroom decision making. The government therefore will:
• Introduce secondary legislation to require all companies, private and public, of significant size to explain how their directors comply with the requirements of Section 172 of the Companies Act 2006 to have regard to employee and other interests.
• Inviting the FRC to consult on the development of a new Code principle, which establishes, as an important component of running a sustainable business, the importance of strengthening at board level the voice of employees and other non-shareholder interests. This will include inviting the FRC to consult on a specific Code provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce.
• The ICSA and the Investment Association will be asked to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders at board level. In addition, the GC100 has been asked to publish a new advice and guidance on the practical boardroom interpretation of the director’s duty in Section 172.

Corporate governance in large privately-held businesses

There are two main government proposals here:
• Introducing secondary legislation to require all companies, private and public of a significant size to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code.
• Inviting the FRC to work with the Institutes of Directors and other industy bodies to develop a voluntary set of corporate governance principles for large private companies.

The spotlight of world media is now fully on organisations when it comes to compliance and the consumers have never had a greater understanding or power when it comes to where they take their business.

Non-compliance with the new regulations coming into place is not an option, but it is clear that organisations need help when it comes to focusing the mind and knowing where to begin. Technology could be the key to unlocking this puzzle, and with the right tools in place, the burden of proof could be eased considerably.

eShare works with hundreds of organisations and their company secretaries all over the world and we understand the demands and challenges of the role. To hear more about how we can help address some of the issues outlined in this paper, please get in touch via email on info@eshare.net, or call us on +44 (0) 845 200 7829.

posted on & filed under Corporate Issues, Governance News.