On 5 April 2017 the Business, Energy and Industrial Strategy (BEIS) Committee published its report on corporate governance in UK business, following a number of recent high profile corporate governance failures.
The Committee has noted the existing reliance on the UK Corporate Governance Code (the Code) and the ‘comply or explain’ model of governance, as opposed to a more stringent, regulatory model. Whilst it does not believe that prescriptive regulation is the way forward, it does consider that there is significant room for improvement in UK corporate governance.
The report states:
Whilst supporting the current comply or explain basis of the UK Corporate Governance Code, we propose a series of reforms designed to require directors to take more seriously their duties to comply with the law and the Code relating to corporate governance.
These include requirements relating to more specific and accurate reporting, better engagement between boards and shareholders, and more accountable non-executive directors.
Crucially, to combat what are currently very weak enforcement mechanisms, we recommend a wide expansion in the role and powers of the Financial Reporting Council, to enable it to call out poor practice and engage with companies to improve performance.
The Committee has made a number of recommendations, and it is expected that these will be considered by the FRC during its fundamental review of the UK Corporate Governance Code, announced in February 2017.
The Committee’s recommendations include:
- Reporting on fulfilment of director's duty to promote the success of the business
An amendment to the Code to include informative narrative reporting on the Board’s fulfilment of Section 172 duties. Boards must explain in detail how they have considered the interests of all stakeholders of the company. Any breach of S.172 duties could be subject to legal action by the FRC.
- Expanding the powers of the FRC to enable it to call out companies engaged in poor practice and to engage with them to improve performance; this would include the publication of a RAG rating of an organisation’s compliance with the Code. The FRC would have the power to report any failure of the Board collectively, or by an individual Board member, to shareholders.
- Simplification of remuneration
The Committee has recommended a return to a salary-only method of remuneration for Chief Executives, with the phaseout of LTIPs (no new LTIPs to be agreed from 2018), to be replaced by deferred stock. There should also be a move away from bonus payments rewarded without particularly stretching targets. It has also recommended that all organisations should be required to publish their pay ratios.
- Encouraging diversity on Boards, including cognitive diversity: the Comittee encourages the appointment of workers to Boards and also recommends that the FRC embeds the promotion of the ethnic diversity of boards within its revised Code.
- Chairs of remuneration committees to be expected to resign if their proposals do not receive the backing of 75% of voting shareholders. The Committee has also recommended a Code revision to include a requirement that there should be a binding vote on executive pay awards the following year in the event of there being such a vote. Employee representatives should also be appointed to the remuneration committee to help ensure a more balanced view of executive remuneration.
- Encouraging the Government to set a target of at least 50% of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies being women by May 2020.
- New corporate governance code
The establishment of a new corporate governance code for the largest privately owned companies, developed and overseen by the FRC, along with the establishment of a new body to oversee and report on compliance (which would be funded by contributions from the companies themselves).
The report states that ‘no law or governance code can eradicate the risk of serious failings of corporate governance, risks that are higher where there are small boards and dominant personalities involved, but a Code can serve to raise awareness of good practice and, over time, help to improve of standards of corporate governance in private companies, large and small’.
After a three year period, should the new code fail to improve corporate governance standards or reveal high rates of unacceptable non-compliance, then a mandatory regulatory regime should be introduced.
Response to the report has been broadly supportive, however, as the Chief Executive of the CBI, Carolyn Fairbairn reported, "the CBI is absolutely clear that the unacceptable behaviour of the few does not reflect the high standards and responsible behaviour of the vast majority of companies”.
Elizabeth Richards, Head of Corporate Governance at the Institute of Chartered Accountants in England and Wales, said some companies “will find the proposals challenging”, but that the Committee’s recommendations “have the potential to bridge the growing divide between the public and business.”
- The UK Corporate Governance Code: Directors’ Duties
- Corporate Governance and your business: Sense and Sensibility?