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Corporate Governance Reform: The Government’s Response to the Green Paper Consultation

Introduction

Following the Corporate Governance Reform Green Paper Consultation published earlier this year by the Department for Business, Energy and Industrial Strategy Committee, the Government has published its response which outlines measures that aim to strengthen the UK’s corporate governance system.

Key Measures

Key measures outlined in the response include the following:

  • The Financial Reporting Council (“FRC”) is to consider and consult on a UK Corporate Governance Code provision requiring premium listed companies to adopt, on a “comply or explain” basis, either:
    • a designated Non-Executive to represent employee stakeholders;
    • a formal employee advisory council; or
    • a director to be appointed from the workforce.

There is an acknowledgement that increased employee engagement has benefits to performance and productivity and the FRC is to provide guidance on mechanisms company boards could adopt. The Institute of Chartered Secretaries and Administrators and the Investment Association (“IA”) are also working on guidance.

  • A voluntary set of corporate governance principles for large private companies is to be developed by the FRC together with various groups such as the Institute of Directors. All companies of a “significant” size will need to disclose their corporate governance arrangements in their Directors’ Report and on their website, including whether they follow any formal code.
  • Ratios of CEO pay to that of the average employee at all “quoted” companies will need to be published – these will only cover UK employees and CEO pay will be taken from the “single figure” in the existing directors’ remuneration report. A draft Statutory Instrument will be published this year.
  • Quoted companies will need to better explain the range of outcomes from complex share based incentive schemes – unfortunately the action in the report does not go in to detail on how this is to be achieved.
  • The Government will not be looking to abolish Long Term Incentive Plans (“LTIPs”). The report suggests companies should avoid conforming to a rigid LTIP structure and consider which model is appropriate to their strategy but there are no real concrete action points here though the recent IA report to this effect is commended.
  • The FRC will consult on extending the minimum holding period for LTIPs from 3 years to 5 under the Code. Market practice is heading there anyway but it was specifically noted this would bring the period closer to the seven-year minimum for banks. It will be of interest to observe how far the strict remuneration requirements for financial services could be seen as a model for the future for more companies.
  • All companies of a “significant” size, probably >1,000 employees (including private companies) will need to explain how their directors comply with the requirements of their duties to have regard to stakeholders. Guidance is to be published on how to do this by the GC100.
  • Existing powers to sanction directors for breach of their duties are to be better used by cooperation between the FRC, the Financial Conduct Authority and the Insolvency Service. FRC powers will also be considered further.

Pett, Franklin & Co. LLP are experts in employee share schemesexecutive incentives and share valuation

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