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Corporate Governance Reform - the Government response to The Green Paper consultation


The government has now published its response to the Business, Energy and Industrial Strategy (BEIS) Committee’s report on Corporate Governance and has identified the proposals to take forward. Proposals which are being adopted include the CEO pay ratio. Other high profile proposals such as workers on boards and annual binding votes on pay will not be mandated. The measures are proposed to address concerns that a minority of companies are not responding adequately when there is significant shareholder opposition to executive pay and to drive change in how the largest companies engage at board level with employees, customers, suppliers and wider stakeholders. There are also measures to encourage large private companies to adopt stronger corporate governance. Implementing these reforms will be by a combination of legislative and non-legislative means, in particular, with updates to the UK Financial Reporting Council (FRC) Corporate Governance Code. Which firms are covered? The proposals cover premium listed UK companies with separate proposals for private UK companies. What are the time-scales for implementation?

  • UK Corporate Governance Code - FRC to consult late autumn with changes to be implemented 2018-2019.

  • CEO pay ratio - a draft statutory instrument will be published in late 2017. 

  • Legislation:  to Parliament by March 2018. Reforms are due to come into effect by June 2018 for reporting years commencing from that date.

The proposals

  • Annual disclosure of the ratio of CEO pay (using the ‘single figure’) to the average annual pay of the UK workforce(using existing payroll data). A narrative will be required explaining year-on-year changes and how the ratio relates to pay and conditions across the wider workforce. The government is reviewing the methodology. There may be an option to report ratios by pay quartile. (Legislation).

  • Long Term Incentive Plans (LTIPs) to be retained but to focus on longer term outcomes. This recognised concern from respondents to the consultation that removing performance targets entirely from share awards (i.e. using only restricted share awards) could end up rewarding poor performance. Full disclosure will be required on the potential outcomes of LTIPs in a range of scenarios including significant share price growth. (Legislative change). It is proposed that the minimum vesting and post vesting holding period would be extended from 3 to 5 years for executive share awards. This could include a post-employment period. (FRC). Companies to better define action following significant shareholder dissent to pay awards. (FRC). This would be supported by a public register of listed companies with over 20% shareholder dissent. (Investment Association).

  • Remuneration Committees to have broader responsibility for overseeing pay across the company, engaging with the workforce and demonstrating how pay and performance align across the company. (FRC).

  • Require all companies of significant size (private as well as public) to explain how their directors take into account broader stakeholder interests including employees, suppliers, customers and others to comply with the requirements of section 172 of the Companies Act 2006. (Legislative change working with the GC100 group of the largest listed companies, the FTSE100 General Counsels plus joint guidance on practical ways in which companies can engage with their employees and other stakeholders from the Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association).

  • Introduce a new Corporate Governance Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business. It is proposed that, on a “comply or explain” basis, one of three employee engagement mechanisms be considered: (i) a designated non-executive director, (ii) a formal employee advisory council, or (iii) a director from the workforce.  (FRC).

  • For large private companies, introduce a voluntary set of corporate governance principles. (FRC to work with the IoD, the CBI, the Institute for Family Businesses, the British Venture Capital Association and others).

  • Require companies of a significant size (not already covered) and possibly also Limited Liability Partnerships of equivalent scale to disclose their corporate governance arrangements in their Directors’ Report and on their website, including whether they follow any formal code. (Legislation).

  • Commission an examination of the use of share buybacks to ensure that they cannot be used artificially to hit performance targets and inflate executive pay. The review will also consider concerns that share buybacks may be crowding out the allocation of surplus capital to productive investment. (Government).

  • Use existing powers to sanction directors and ensure the integrity of corporate governance reporting. (FRC, Financial Conduct Authority and the Insolvency Service).

Useful links https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640470/corporate-governance-reform-government-response.pdf


This briefing is for general guidance and does not necessarily cover all areas of the topics included in this briefing. It is not designed to give legal or other professional advice.

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