Uk’s Corporate Governance Reforms

The British Government in its response to the green paper in regards to the corporate governance reforms touched on areas that will be reformed starting June 2018. They will use a mixture of both the secondary legislation and make changes to the UK Corporate Governance Code together with the preparation of new guidance and other initiatives in specific areas of concerned. The only area that the reforms don’t touch is the foreign premium-listed companies which may be influenced by the reforms. Therefore, this paper seeks to give an analysis that will identify whether the reforms are the best route for the British government. A list of companies and how they are affected by the reforms will also be highlighted. The suitability of the reforms will be determined by looking at the general impacts of the reforms in various sectors.

An overview of the Green Paper’s Proposals

Although the government itself argued that that the green paper’s reforms are a combination of the best corporate governance reforms, which is except the mandatory reporting of the ratio of CEO pay. The pay is to the average wage of the company’s in the UK and not worldwide workforce, most of the reforms are an adjustment of the existing policies and principles of the current corporate governance. Therefore, most of the companies may not even see the reforms as a challenge or new introduction to their current governance processes. However, it is also worth noting that most of the negative responses to the green paper that was put in place by the government came from most of these companies that are supposed to be affected by the reforms in place. Therefore, the companies will still be expected to implement the reforms irrespective of their views hence they need to be aware of the amount of corporate governance reporting that will be expected from them. The reforms mostly affect the large privately owned companies within the UK that in most cases have been even voluntarily disclosing the arrangements of their internal governance hence will not have the feeling of facing any mandatory or “soft law” governance regulation’s routines. Just as they have been voluntarily doing, under these new reforms, they will now be expected to disclose their corporate governance arrangements regularly.

Areas that are touched by Reforms

The green paper’s reforms cover three specific areas which are the executive pay, the employees and stakeholders inputs at the board levels, and the corporate governance in large private companies.

The executive pay

When it comes to the executive pay, different companies are given the opportunity to respond to their shareholders opposing views on their executive pays, the responsibilities of the remuneration committees, their CEO pay ratios reporting, their clearer disclosure with respect to the shared based incentive components of the remuneration policies and the rising the vesting and holding periods for the share-based remunerations of the same companies.

Having a greater employees and stakeholders input at every board levels

At this stage, the reforms fight for having more inputs of the employees and every stakeholder at the board levels so that their interests are also taken into consideration at each decision-making process. Therefore, the reform will entail a mandatory disclosure of how every company’s board members regard/treat the non-shareholders’ interests and various initiatives and adoptions of the board members of the employees’ engagements approaches and various informal guidance that relates the stakeholders and employees engagements in the daily operations of every company. Therefore, the reform will ensure that companies engage many if not all the stakeholders when making their boardroom decisions on matters that are of interest to every employee and stakeholders of each company. Through this, the governance will be an all-inclusive hence everyone at the company will feel valued and part of the organization.

The mode of corporate governance in large private companies

At this level, the reforms related to the introduction of new corporate governance of the private companies that also requires them to be disclosing their corporate governance arrangements just like any other company. The government’s response to the green paper also touches on the possible reform, which entails the strengthening of the supervisory mandates of the Financial Reporting Council (the “FRC”) in regards to the corporate governance reporting.

Finally, the government has decided that it will not be acting only the two recommendations that are usually from the BEIS Parliamentary Committee in regards to the diversity matters, that:

From May of 2020, women should constitute at least half of the appointments of the executive management positions of both the FTSE350 and all the listed companies. And, every FTSE100 companies should be compelled by law to publish the data of their workforce that show a detailed breakdown of how they cover ethnicity and pay bands. These proposals will ensure that the realization of gender equality is attained in every company about their appointments in various positions of powers. Through this, the other women in the society will be challenged even to work hard for them to get appointed to such positions.

In regards to the women’s target, the government seeks to ensure that ensure that it maintains its focus towards the achievement of the Davies Review target that requires that by 2020, women should constitute both the 33% of FTSE board members and 33% of the executive committees and each of their direct reports. When it comes to the diversity reports, the government seeks to ensure that there is a voluntary approach that is supported by the works of Sir John Parker and Baroness Ruby Macgregor-Smith reviews and recommendations (Davies, Teitt, and Nwokora 2015) as well as the new government-sponsored business diversity and inclusion group.

Various Components of the Executive Pay

The CEO’s Pay Ratio Reporting

The reforms in this area will cover some of the mandatory disclosure of the remuneration of various directors of specific companies in regards to the report of the ratio of CEO pay to the average pay that is expected of the company’s that operates within the UK’s workforce. It also gives a detailed explanation of the changes that are supposed to be made to the ratio from year to year and how these specific ratios connect to the pay conditions across the country’s workforce as a whole.

There have been debates that relate to these reforms, and other people have also criticized them since the moment they were introduced by the “Goldman Sachs” flaw that is commonly referred to as the pay ratio for the CEO of a company such as the Gold Sachs may look extreme due to the generally high level of most of the company’s employee’s where the pay of the CEOs are always higher than those of the employees that do the physical work. This kind of information may be misleading when it comes to giving the right information about the general company’s workforce remunerations. Not surprisingly, close to 75% of the listed companies that commented on the green paper proposals were opposed to this reformation.

The ratio will be used to calculate the remuneration of the UK employees’ only based on the CEO’s total annual remuneration such as the “single figure” that is required to be set out in the CEO’s pay report. By applying this ratio reporting, one can be hopeful that any potential uncertainty will not be there in regards to the UK’s gender pay gap laws even with the non-UK workers. Therefore, even the multinational companies will also be free to publish in addition to the ratio given by the UK government any other broader ratio that will be covering non-UK employees too.

The newly proposed CEO pay reporting needs will corporate with the current requirements that has been in place since 2013 that expects the directors pay reports of the country quoted companies to make public the yearly increase in their CEOs pays in comparison to the previous years in regards to every annual increase in the average pay of the whole workforce. However, when comparing to the disclosure of the proposed CEO pay ratio, as at now many companies can now use various comparator of every employee inappropriately. Therefore, there will be a need for every company to explain why they resorted to using a different group.

Other Executive Pay-focused Reforms

The government also suggests the introduction of a requirement that every listed company has to give a detailed explanation of their remuneration policies through secondary legislation. Such policies should be approved by the shareholders through a simple majority vote based on the UK laws that may result to a different outcome from what the UK government and many other stakeholders see as being complex shared-based incentive schemes that most companies commonly adopt as part of the remuneration policies for the senior executives that work for every company. Other changes/reforms in this section comprise of various changes to the current Governance Code for which the FRC has the main responsibility and oversight. Therefore, the government will be asking the FRC as part of the reviews of Governance Codes and related other related guidance.

Components of having a greater employee and other stakeholder input at the board level

The worker’s input to the board

Before the publishing of the government’s green paper, there used to be a lot of discussions regarding the possibility of the government of the UK introducing a requirement that is seen in other jurisdictions, for workers representative director, which needs to be appointed by the company’s board members. However, the green paper has proposed that companies need to adopt one of the three possible “workers/stakeholders-engagement” approaches that can assist in providing the workforce and other stakeholders much greater inputs at every board meetings/levels. The three approaches are: first, some of the non-executive directors of each company are assigned the responsibility of ensuring that the board members always hear the voices of the stakeholders. Secondly, there can be a creation of the stakeholders’ advisory panels, and third, one or some stakeholders can be appointed as a representative of others to the board.
The response of the government is a summary of many concerns that each one of the three responsibilities has. For instance, there is a possibility that they can create a conflict of interest, there can be a difficulty in choosing the right person to take on the role of being the representative, and there can also negatively impact on the unitary nature of the respective boards and their effectiveness when it comes to their functioning.
However, the UK government has resorted to asking the FRC to go ahead and consult on the composition of the Government Code of fresh requirements for the listed companies to follow, on the Code’s to adhere. Therefore, one of the workers-stakeholders approaches.

Other Stakeholders Inputs to the Board

The government has suggested strengthening the engagements of various stakeholders in many companies by using various disclosures and guidance measures. Therefore, the engagement with the stakeholders of the companies that exist in the UK is a thing that the Companies Act of 2006 acknowledges by providing that the directors to respect the interests of other non-shareholder stakeholders like the employees, the customers and the suppliers of a given company when exercising their main statutory role to act in a manner that would promote the success of each company (Clark & Knight 2008).
A significant change that is suggested will expect that by using the secondary legislation, both the private and the public companies are put to the task of disclosing how their board has complied to this provision that seeks to ensure that the employees and stakeholders’ interests are considered when making key decisions. However, the government also claims that the implementation of the new requirements will subject to other new considerations. Therefore, it will be a bit difficult to be sure at this stage where the actual implementation has not taken place whether every company will fully comply and provide the needed disclosure. The government however, believes that the process will involve the explanation of how key stakeholders in each company will have been identified, ways through which their views are sought, and the reasons as to why the engagement approaches were considered as the most appropriate ones and how the info obtained from them influenced the decision-making process of the boards.

Corporate Governance for the Large Private Companies

While most of the large private companies may choose to voluntarily follow and comply to the green paper’s requirements of disclosing their corporate governance, together with disclosing the programs of their corporate social responsibility as applicable in accordance with the guidelines of the Monitoring Group that seek to ensure that there is a disclosure of portfolio companies and the equity firms though none has been mandatory. The reforms that have been put in place by the government would change by expecting through the use of a secondary legislation that every company both the private and the public with at least a 1000 employees for private and 2000 employees for public discloses their corporate governance regimes in the directors’ reports that are always published on their websites.

Significantly, the UK government has confirmed that it will also look into extending the requirement to the limited liability partnerships (Aguilera et al. 2006). Since their employee threshold is not always limited to the UK employees and this could involve some large professional services firms. The government has also gone ahead and asked the FRC to coordinate with other agencies including the Confederation of the British Industry, the Institute of Directors and the British Venture Capital Association to come up with a new voluntary set of corporate governance that will serve the large private companies.

Way Forward:

There is still room for the FRC to keep consulting on some elements of the green paper proposal to form part of the review of the Governance Code in a few months from now. The duty of coming up with corporate governance will also start very soon. BEIS will be in a position to publish all the necessary draft secondary legislation before March 2018, and they can still consult areas where they considered necessary to consult on. The actual intention is that the reforms that have been proposed will be expected to apply to every company that will be reporting starting from June 2018.

Finally, the government should also announce the details of the reviews that will take place in regards to the use of the share buybacks by companies such as ensuring that they cannot be used artificially to affect the performance targets and also affect the executive pay.

The table in figure 1 shows how the reforms will either affect or not affect various companies. Figure 1.

Key Points:

1. The table forms show part of the annual reports and accounts of one UK company with equity share capital that are either officially listed in the UK or traded on NASDAQ or NYSE.
2. The Equity Act 2010 on Gender Pay Gap Info Regulations 2017 (SI 2017/172).

In conclusion, the changes that have been put in place make sense and are a possible positive move that will form positive grounds for dialogue between the investors and the executives and the power the powers of investors to have a say in the decision-making process is also increased. However, the reforms alone may not be enough to narrow the gap that exists between the CEOs pays and that of the employees. Therefore, there are some ways that can be used to diminish the gap even further. These can be attained by applying real structural and cultural changes within each company. Therefore, at the board level, there can be a proactive engagement with the investors and by ensuring that there is an adoption of some more responsible policies regarding linking pay packages to the employees’ performances. The balancing has to be correct, and still appeal to every stakeholder and shareholders and most importantly has to be socially acceptable. In regards to the mode and ratio of remuneration, there is a need to find an appropriate way of ensuring that the ratios are implemented, and every employee is compensated about the level of contribution that they make in the production process. And that is why both the ratios and remuneration to performance need to be implemented at the same time.