Corporate Governance Reform

In the wake of a tumultuous 2016 (with events such as Brexit, Donald Trump’s election as the President of the United States and the BHS department store scandal causing waves internationally), we begin 2017 in an entirely different business climate. The goalposts have shifted; technology is advancing; we are to be recognised and treated fairly within business under the Equality Act 2010; the trade deal with the European Union remains uncertain and it feels as though there is a need for the UK to stay relevant in its ever-changing surroundings. Coupled with this are the social anxieties and levels of inequality believed to exist between consumers, ordinary workers and the “privileged few”.

In an attempt to reconcile feelings of disparity and uncertainty, Theresa May has launched a green paper under the Department for Business, Energy and Industrial Strategy aimed at “building an economy that works for everyone” and maintaining public trust in UK business. The green paper is to instigate a discussion on the reform of the corporate governance framework. However, what does this mean exactly and how is it expected to change legislation for British business? Corporate Governance regulates large companies to ensure it has the right checks and balances in place to strengthen decision-making and accountability. The UK currently has a corporate governance framework, formally known as the UK Corporate Governance Code, which sets out the standards of good practice in relation to board leadership, executives, remuneration and relationships with shareholders and stakeholders. Despite this regulation, it is noted by the Government that, in recent years, the behaviour of some large companies has resulted in the damaged reputation of many. With this in mind, May has set out a green paper, a consultation document enabling feedback on legislative proposals, to reform the current corporate governance framework.

The green paper focuses on the reform of three main areas of corporate governance: executive pay; the voice of the employee, consumer and shareholder, and maintaining the right conditions for investment. Executive pay is considered first within the proposals and is perhaps one of the more unsettling areas for businesses. It is established that there is a disconnect between the pay of ordinary working people and the pay of executives, and that shareholders have often questioned whether executive pay matches the longer-term value of the companies under their management. Executive pay reforms in 2013 gave shareholders a much stronger voice in relation to executive pay, however, executive pay has increased significantly – in fact, quadrupled, over the last 18 years largely down to pay incentives and annual bonuses. Therefore, the options set out by the Government in this green paper include: making some elements of executive pay subject to a binding vote; setting an upper pay threshold; strengthening the use of votes by shareholders and introducing more frequent binding votes through AGMs; and strengthening the corporate governance code to specify how companies are to engage with shareholders on pay. With this, the voice of those outside of the executive is considered. It is proposed that they are to be encouraged to utilise their voting rights further, and there is to be a pay ratio or disclosure of annual bonus targets to shareholders. In addition to this, it is proposed that some features of the corporate governance framework be reformed to consider extending standards to privately held companies to set the right foundation for the UK to undertake business.

It is clear that these proposals consist of more than a mere ‘touch-up’ to the current code of practice in relation to corporate governance. Instead, they denote an important Government message of the strength of UK business - significant, as it prepares to enter negotiations on trade with other countries. Furthermore, the green paper strengthens the message around transparency within business and the balance of interests between companies, employees and stakeholders, acknowledging that large companies operate differently. It might, then, be acceptable to surmise that such reforms can only lead to increased bureaucracy, extensive reporting and tighter regulation; perhaps making the operation of day to day business more difficult. Greg Clark, the Government business minister, disputes such a synopsis and has instead stated that the Government intends to use non-legislative standards rather than impose further regulation. He is also reported to have stated that the Government does not wish to “overturn” Britain’s successful system of having unitary boards, and these reforms merely insist that ordinary working people “deserve to have confidence that businesses act responsibly and fairly”.

The consultation closes on 17 February 2017 and, although the outcome is yet to be seen, UK businesses can certainly take the message that May will not tolerate hidden, careless and unlawful business in the UK if it is to stand alone in business arrangements going forward – whether enacted in legislation or not.