Corporate governance update

18 / 10 / 2017

As Jane Austen arrives on our fresh ten pound notes, it seems appropriate to misquote her: “It is a truth universally acknowledged that a government without the good fortune of a majority needs to think very carefully about which parts of its legislative programme to pursue”. So it is at present.

Last year, Theresa May’s team championed a desire to reform the corporate governance landscape. It was a shame that the government did not survey that landscape first; however, now it has started to do so. A more humble government seems keen to work with influencers in the landscape to move forward a number of initiatives in a consensual manner, without primary legislation. This may actually present an opportunity. The reality is that governance is a body of practices and behaviours which go beyond legal requirements. Governance is all about good behaviours and no legislature can ever pass an effective law to define how a director should think. The UK government has indicated that it lacks the wherewithal to bring forth new primary legislation in the governance arena and that it will therefore rely on secondary instruments and other measures, including industry good practice initiatives and the work of independent regulators.

We now know which areas the government wishes to focus on:

  • the relationship between duties to shareholders and responsibilities to other stakeholders, and related narrative reporting;
  • remuneration;
  • large privately-held companies; and
  • the UK Corporate Governance Code.

By way of a round up, these are the relevant new developments in the field of governance:

  1. the government has responded to its own Green Paper and government response to the Select Committee report, each on corporate governance (see “The watered down corporate governance reform” below);
  2. the Financial Reporting Council (FRC) is consulting on changes to Narrative Reporting, including to fully implement the non-financial reporting directive;
  3. we wait to receive the conclusions from the London Stock Exchange’s call for evidence regarding changes to the AIM Rules, particularly in relation to governance issues (see “What can the industry expect from the LSE’s review of AIM Rules?”);
  4. the new corporate offence relating to failure to prevent tax evasion came into effect on 30 September 2017, demonstrating the manner in which corporate standards of behaviour, corporate governance and tax are merging; and
  5. three new/refreshed corporate governance codes lie ahead:
Financial Reporting Council

UK Corporate Governance Code

The FRC is embarking upon a project of its own initiative to review and refresh the UK Corporate Governance Code.

There is broad consensus that the document has itself become a little unwieldy, with disproportionate focus on certain areas.

An effort to update the document and render it more focussed on the core principles and easier for the user is to be welcomed.

In addition, the FRC is to be asked by the government to make certain further changes to its code.

Quoted Companies Alliance

Corporate Governance Code for Small and Mid-Size Quoted Companies

The Quoted Companies Alliance (QCA) Corporate Governance Code for Small and Mid-Size Quoted Companies is a document written by the membership organisation which represents the sector.

The document is focussed around a set of principles, a statement of what is an effective board and a set of expected disclosures.

The document is, by its very nature, intended to be purposive and not prescriptive and to encourage companies to positively present how and why good governance is deployed.

The document is being refreshed to become more concise and less equivocal.


New voluntary code for large privately-held companies with 200 or more employees

A new corporate governance code or statement of best practice is anticipated for large privately-held companies.

This will be a voluntary document, focussed on companies with more than 2,000 employees.

Given that the pressure for such a code is a response to perceived poor standards of behaviour by companies, including those considered by the Business, Innovation and Skills Select Committee and the Work and Pensions Select Committee of the House of Commons last year, one must expect that there will be significant pressure on in-scope companies to adopt such a standard or the superior standards of the FRC or the QCA Code.

However, it is also important for the government to recognise the number of companies which already adopt good governance practice and already follow codes on a non-mandatory basis, whether listed or not.

The watered down corporate governance reform

The prime minister’s weakened government has dropped the most controversial proposals for companies.

The government issued a Green Paper on corporate governance reform in November last year, when the strength of her premiership was such that she thought she could walk on water. The outcome of the snap election demonstrated that she has to swim like the rest of us, and in choppy waters.

When the government finally published its response to the Green Paper at the end of August, most of the controversial elements had been significantly watered down. Where does the government stand now regarding the main pillars?

‘Name and shame’ register

Quoted companies are already required to have annual votes on shareholder pay, although the votes are advisory in nature. The proposal to change this to an annual binding vote has been dropped. Instead, the government suggests a public “name and shame” register of those listed companies whose pay awards fail to get the support of 80 per cent of shareholders who vote.

This seems to be a largely symbolic measure. Under the existing system, shareholders already have a binding vote on the three-year forward executive pay policy in addition to the annual advisory vote on executive pay packages in the financial year being reported on.

Pay ratios

This is one of the government’s initial proposals that has largely remained unchanged: the obligatory annual publication of “pay ratios” comparing a chief executive’s remuneration with that of the business’s average workers.

The problem with this approach is that a single-figure approach is simplistic and open to misinterpretation in the absence of detailed information about the nature of the company. For example, an investment bank, where average salaries are generally high, would have a better pay ratio than a company in the retail sector. Furthermore, this may encourage outsourcing of lowly paid functions simply to game statistics. Context is vital.

Employees on boards

Worker-nominated representatives are commonplace within boards in many European countries. However, in those countries company boards are typically structured in two tiers with a (non-executive) supervisory board and an (executive) management board with different sets of duties and responsibilities. Worker-nominated representatives would become members of the supervisory boards.

In an English board each director is equal, with the same duties, rights and responsibilities (the unitary board). To introduce this new category of director without also considering the governance structures of companies challenges this model.

Most importantly, would new directors be subject to the same duties as the other directors, in particular the duty to promote the success of the company for the benefit of its shareholders as a whole?

Companies are already wise to avoid public disputes with shareholders over remuneration. Indications are that companies engaged more in the 2017 season than in 2016.

They are already used to a raft of disclosure requirements, so pay ratio reporting should not be a problem, although it would be wise to explain the numbers. In a similar way, it is prudent for any company to listen to the employee voice, whether in the boardroom or not.

Parts of this article were first published in The Times’ Brief on 14 September 2017 and are reproduced with kind permission.

For further information please contact Edward Craft at