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Updating the corporate governance code

The UK is generally acknowledged to have one of the most flexible and effective corporate governance codes in the world.  This has helped to engender a measure of stability and trust which has resulted in the country being viewed as the number one destination for inward investment in Europe.[1]

But that’s no reason to be complacent.  If the UK is to continue to be competitive in an ever changing market, its corporate governance code has to develop and flex in order to meet the challenges posed by changes in attitude, business practice and technology. Complacency would only lead to stagnation; and it has to be admitted that, strong as the current code is, there are still some areas of governance which have given rise to negative headlines in recent times.

When she came to power, Prime Minister Theresa May was vocal on the need for governance reform; commenting on the way in which failings in a small number of companies was damaging the reputation of UK organisations in the eyes of the public, investors and shareholders. Having issued a green paper and following extensive consultation at the end of August 2017 the government announced a package of corporate governance reforms. [2] These proposals will themselves be subject to a further consultation by the Financial Reporting Council (FRC) with a view to issuing draft legislation in 2018.

The proposals largely fall into three areas;

Executive pay. Proposals here include broadening the remit of remuneration committees to engage with the wider workforce and to explain the rationale between executive and the wider company pay policy. Quoted companies will in addition be required to annually report the ratio between executive and average pay and to provide a clear explanation in respect of remuneration policies.

An action plan will also be recommended in respect of listed companies where there is significant shareholder opposition to executive remuneration. The minimum vesting period for executive share awards is also recommended to be increased from 3 to 5 years.

Strengthening employee, customer and stakeholder voice. The need to strengthen the voice of interested parties received wide support; in particular when it came to reassuring constituencies that companies were run “not just with an eye to the interests of the board and the shareholders, but with a recognition that they have responsibilities to employees, suppliers, customers and wider society.”

 In the light of these responses the government proposes a requirement for all companies of a significant size (both public and private) to explain how their directors comply with their duty to take account of employee and other interests. In addition, the FRC is to consult on introducing a new provision within the code in respect of strengthening voice of employees and others at board level.

Governance in large privately held businesses. Recognising the impact of governance failings within large privately held businesses, the government intends to work with interested bodies in order to develop a governance code in respect of privately held business. In addition, secondary legislation will require companies of a significant size to report on governance arrangements. Consideration is being given to include large LLPs within this requirement.

[1] https://www.gov.uk/government/publications/why-overseas-companies-should-set-up-in-the-uk/why-overseas-companies-should-set-up-in-the-uk

[2] https://www.gov.uk/government/consultations/corporate-governance-reform

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