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How is UK corporate governance likely to evolve in 2018?

Posted on 16 November 2017 by Nicholas McVeigh

How is UK corporate governance likely to evolve in 2018?

The UK is, as the Government's 2016 Green Paper on corporate governance reform noted, already an established international leader in corporate governance, one of the reasons that it has become an attractive destination to do business.

The Government's aim now is to "retain and extend that leadership and support companies to take better decisions, for their own long-term benefit and that of the economy overall." It has therefore set out a number of proposals for reform in three key areas during 2018. Here are the some of the headlines of the Government's proposals:

1. Executive pay (quoted companies)

  • Shareholder opposition to executive pay: require certain quoted companies (perhaps all premium listed companies or only FTSE 350 premium listed companies) to take specified steps when they encounter significant shareholder opposition to executive pay. These steps might include responding publicly to dissent within a certain period, or verifying that dissent has been sufficiently addressed by putting the company's remuneration policy to a vote at the next AGM. The Investment Association will be invited to maintain a public register of listed companies encountering shareholder opposition of 20%+ to executive pay.
  • Role of remuneration committees: give remuneration committees greater responsibility for demonstrating how pay and incentives align across the company and explain to the workforce how decisions on executive pay reflect wider pay policy. Chairs of remuneration committees will also be required to have served for at least 12 months on a remuneration committee (unless clearly not appropriate or impossible).
  • Transparency in executive pay: require quoted companies to report annually on the ratio of CEO pay to the average pay of their UK workface.
  • Long-term executive pay incentives: require quoted companies to provide a clearer explanation in remuneration policies of the range of potential outcomes from complex, share-based incentive schemes. The minimum holding period for share-based remuneration may also be increased from three to five years.

2. Employee, customer and supplier voice

  • Strengthening employee voice: develop a new Corporate Governance Code principle to establish the importance of strengthening the voice of employees and other stakeholders at board level.
  • Employee engagement: introduce a new Corporate Governance Code provision to require premium listed companies to adopt, on a "comply or explain" basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce.
  • New reporting requirements: require certain companies (perhaps those with 1,000 employees or more) to explain how they have identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information influenced boardroom decision-making.

3. Corporate governance in large private businesses

  • Corporate governance principles: encourage the development of a set of voluntary corporate governance principles suitable for the widely varying circumstances and ownership structures of large private companies.
  • Corporate governance disclosures: require all companies of a significant size (likely those with 2,000 employees or more) to disclose their corporate governance arrangements in their directors' report and on their website.

Next steps

Some of the proposals for reform will require new secondary legislation, which the Government intends to lay before Parliament by March 2018. The Government currently intends to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.