On 29 November 2016, the Department for Business, Energy and Industrial Strategy published the Corporate Governance Reform Green Paper which requests views on a number of proposals including executive pay, strengthening the employee, customer and wider stakeholder voice, corporate governance in large private businesses and other corporate governance challenges.
The proposed reforms are wide-reaching and, in the event of their uptake, they will have a direct impact on executive remuneration in both public limited companies and private limited companies.
The Green Paper highlights executive pay as an area of significant public concern; the ratio of FTSE 100 CEO pay to employer pay was 47:1 in 1998, 132:1 in 2010 and 128:1 in 2015, and questions have been raised by shareholders/stakeholders as to whether such increases are reflected in the value generated by the businesses that they own. The Government is inviting views on a number of proposals in the areas of shareholder voting and other rights, shareholder engagement on pay, the role of remuneration committees, pay disclosure and long-term pay incentives.
Firstly, in relation to shareholder voting and other rights, the proposals include: – making all or certain elements of the executive pay package subject to a binding vote; introducing stronger consequences for a company losing its annual advisory vote on the remuneration report; requiring or encouraging quoted company pay policies to (a) set an upper threshold for total annual pay (from all elements of remuneration), and (b) ensure a binding vote at the AGM where actual executive pay in that year exceeds the threshold; strengthening the Corporate Governance Code to provide greater specificity on how companies should engage with shareholders on pay.
Secondly, in respect of shareholder engagement on pay, the proposals comprise: – mandatory disclosure of fund managers’ voting records at AGMs and the extent to which they have made use of proxy voting; establishing a senior “shareholder” committee to engage with executive remuneration arrangements; the consideration of ways to facilitate or encourage individual retail shareholders to exercise their rights to vote on pay and other corporate decisions.
Thirdly, in relation to the role of remuneration committees, the proposals include: – requiring the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy; requiring the chairs of remuneration committees to have served for at least 12 months on a remuneration committee before taking up the role.
Finally, in respect of pay disclosure, the proposals comprise pay ratio reporting and the disclosure of bonus targets and – in relation to long-term pay incentives (“LTIPs”) – consideration of ‘restricted share awards’ as an alternative to LTIPs and extending the holding periods of share options to a 5 year minimum.
Strengthening the Employee, Shareholder and Wider Customer Voice
Under the Companies Act 2006, directors are under a duty (amongst others) to promote the success of their companies whilst having regard to a range of interests including those of shareholders. The new proposals include: – creation of stakeholder advisory panels; designating existing Non-Executive Directors to ensure that the voices of key interested groups (particularly employees) are being heard at board level; appointment of individual stakeholder representatives at board level.
Corporate governance in large private businesses
The Green Paper notes that good governance affects more than simply the owners and managers of companies, but employees, customers, supply chains and pension fund beneficiaries. Society also has a legitimate expectation that companies will be run responsibly in return for the protection of limited liability. Furthermore, since 1999, there has been a correlated decline in public limited companies – which are subject to higher standards of corporate governance and greater public scrutiny – and an increase in the prevalence of private limited companies. Proposals for reform include applying enhanced standards of corporate governance more widely and applying reporting standards more consistently.
The Corporate Governance Reform consultation closes on 17 February 2017. To access a copy of the Corporate Governance Reform Green Paper, please click here.
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