Government suggestions to reform corporate governance
The widely-trailed consultation on how to reform corporate governance, including for privately-owned companies, was released today.
Lisa Wallis, Senior Associate at Blake Morgan LLP commented, "Proposals on reforming corporate governance have been on the agenda for years. However, given the extent of public discontent shown by the vote for Brexit and the recent election of Donald Trump, it is possibly a topic that this Government feels it cannot afford to ignore and wants to be seen trying to tackle.
"This consultation comes just a couple of months after the Institute of Directors warned companies that they needed to get to grips with corporate governance or regulators would do it for them. Quoted companies are already highly regulated but today's green paper includes a number of proposals for non-quoted and privately owned companies.
"However the proposals in relation to privately-owned companies do not go nearly as far as recent press reports suggested. At this stage the Government is initiating a discussion with businesses on a number of potential methods to show the public, shareholders and employees that a company is behaving responsibly. "
Today's green paper suggests that the voice of employees, customers and other interested stakeholders will be strengthened at board level, potentially through:
- 'Stakeholder advisory panels' to offer greater transparency without giving staff a vote at board meetings;
- Nominating existing non-executive directors to represent the interests of key groups including workers (rather than a worker representative actually being on the board);
- Appointing individual stakeholder representatives to company boards; or
- Strengthening and clarifying existing reporting requirements.
The consultation asks what number of employees or other size threshold these suggestions should apply to.
It also suggests that the very largest privately-owned companies should be subject to an enhanced standard of corporate governance similar to that which currently applies to premium Stock-Exchange listed companies under the UK's Corporate Governance Code. The Code could be expanded to large companies, or a new one may be devised. The consultation asks what the threshold for these 'very largest' companies should be. It also asks whether other reporting requirements should be extended to businesses of a certain size (such as the recent and forthcoming reporting requirements in respect of modern slavery and gender pay) rather than based on whether the relevant company is quoted or not.
Lisa said, "Directors of privately-owned companies do currently have a duty to promote the success of the company, and this includes the interests of the company's employees and acting for the benefit of its members as a whole, as well as the need to foster relationships with suppliers, customers and others. They also have a number of fiduciary duties, for example, to avoid conflicting interests and duties.
"If adhered to properly, current legislation should be sufficient to prevent companies behaving inappropriately. Listed companies have been subject to additional regulation for years, but history shows it hasn’t always prevented the poor practices of some companies. Nevertheless, the Government obviously wants to take steps to increase awareness of these duties and to strengthen the effect of reporting. The question will be whether, after consultation with businesses, the final proposals will have enough 'teeth' to make a difference".
Adrian Lamb of Blake Morgan's Pension Team said, "Whilst it is undoubtedly a good idea to have the views of pension scheme beneficiaries represented at Board meetings and in other forums, the Paper, which is remarkably light on references to pension schemes, does not suggest what would happen if those views were ignored. For the majority of well-run private and public companies, those views would be, and probably are largely already, taken into account. For those companies that do not account for those views, and for those that by design might not have taken those views into account in any event, there is no reference in the Paper to any corrective action or sanction.
"Whilst the Paper focuses on remuneration, there is nothing in it dealing with dividends where, arguably, private companies have significant options available to enrich owner shareholders at the potential expense of other stakeholders, including the pension fund. Whilst good in the sense of attempting to improve governance, the Paper can hardly be said to get to grips with recent failure situations or close calls which have potentially been affected not only by, amongst others, corporate governance issues, but also by general economic conditions and changing markets, dividend policies and external factors such as quantitative easing. It might well be remembered that most companies that fail did not start life with that intention in mind and there is likely to be a multitude of factors that lead to the failure."
Aside from these provisions for privately-owned companies, much of the green paper is devoted to quoted companies. The background to this is that the average chief executive of a FTSE 100 firm is now paid close to £5m, more than 170 times the average worker, according to the High Pay Centre. By contrast, in 1998, the average FTSE 100 CEO was paid 47 times their average employee.
Analysis of six major UK companies in 1980 found that CEOs were paid between 13 and 44 times their average employee. Recent rebellions by shareholders over executive pay at AGMs have highlighted the issue once again. For quoted companies the green paper suggests:
- Shareholder voting rights on executive pay could be increased, for example by giving shareholders a binding vote annually on pay rather than the current 3-yearly vote on pay policy and an annual advisory vote on actual pay. A number of alternatives are put forward, such as stronger consequences if a listed company loses its advisory vote, or an upper threshold for total annual pay;
- Measures to encourage shareholders' engagement in the issue of executive pay, particularly for institutional and individual retail investors;
- Improving the effectiveness of remuneration committees, for example by consulting with shareholders and employees;
- Reporting on pay ratios between CEO pay and pay levels of the wider workforce. The paper asks how this can be done without producing misleading results; and
- Aligning long term incentive plans better with the long-term interests of the company and its shareholders.