Reforming Corporate Governance

Reforming Corporate Governance

The UK has long been regarded as a world-leader in corporate governance, combining high standards with low burdens and flexibility.” Finding ways in which to build on these strengths as a means to enhancing UK competitiveness is the driving force between a Government consultation on corporate governance reform.

The consultation, which follows the issuing of a green paper, closes on 17 February and forms part of an ongoing review into all aspects of corporate governance. In particular, the green paper asks for views on executive pay, employee and customer voice, and corporate governance in large private businesses.

The section on executive pay goes into some detail, encompassing areas such as shareholder voting and engagement, the role of the remuneration committee, transparency and long-term pay incentives. Whilst acknowledging the importance of attracting and retaining ‘management talent’, the green paper highlights widespread public and institutional investor concerns about current levels of executive pay. In particular the paper questions whether executive pay has become disconnected from long-term company performance.

These questions are set in the context of the measures taken to reform executive pay in 2013. The paper notes that, since the reforms, quoted companies have received on average a 93% approval rating in respect of executive remuneration but that 28% of shareholders do not exercise their right to vote. Accordingly, one of the questions within the consultation is whether more needs to be done in order to encourage institutional and retail investors to make full use of their voting powers.

This leads on to the second section of the paper which looks at strengthening the way in which the interests of employees, customers and the wider stakeholder constituency should be taken into account. Although current UK company law already requires directors to take account of wider interest groups, the paper explores a number of options which would further strengthen those interests. These include the creation of stakeholder advisory panels, designating non-executive directors to represent key interest groups, appointing stakeholder representatives to the board or strengthening reporting requirements relating to stakeholder engagement. In particular, the consultation looks for recommendations on whether any changes should be legislated or voluntary.

The final section of the consultation looks at the extent to which corporate governance requirements should be extended to large privately held businesses; giving the example of 2500 private companies within the UK which have in excess of 1000 employees. Whilst acknowledging that many privately owned businesses follow good corporate governance practices, the wider stakeholder implications should larger private companies get into difficulties have to be taken into consideration. Options here include extending the existing corporate governance code to encompass larger private businesses or drawing up a code which is specific to privately owned businesses.

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