Private companies and executive pay in consultation’s sights

Business and energy secretary Greg Clark MP today launched his much-trailed corporate governance review, which aims to secure Britain’s reputation as the place to do business post-Brexit.

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Covering three key areas, the Corporate Governance Reform: Green paper seeks to test stakeholders’ views on whether executive pay is properly aligned with long-term performance, if governance standards in the largest privately-held companies should match those of publicly owned businesses, and whether employees and consumers should be given greater voice in the boardroom.“The government is determined to make Britain one of the best places in the world to work, to invest and to do business, and part of that means continuing to have a framework of corporate governance that is admired across the world,” said business secretary, Greg Clark.

World-leading corporate governance standards

The green paper comes at a time when the government is formulating a new industrial strategy and negotiating the UK's exit from the European Union.The review also offers the opportunity for open debate around historic rises in executive pay compared to modestly rising share price rises, and wage stagnation for the workforce at large. Both are becoming increasingly important political issues.

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Strengthening corporate governance

Referring to the invitation for businesses, investors, workers and members of the public to give their views on whether governance standards in the largest privately held companies should be raised to meet those of publicly listed firms, Simon Walker, director general of the Institute of Directors, said: “We are very pleased the government is kicking off a wide debate on how to ensure UK corporate governance is up to scratch. The most important element of the proposals will be greater scrutiny for unlisted companies, which is long overdue.“There are around 2,500 private firms in the UK which employ at least 1,000 people, and the damage that can occur when they are poorly governed can be substantial. We welcome the government’s decision to throw its weight behind a code of practice for large unlisted business.”

Increasing employee and consumer voice

A further key aspect of the review is strengthening stakeholders’ voice in the boardroom. This contentious issue outraged some of the business community when it was first suggested in the summer during Theresa May’s leadership campaign.Today’s green paper asks for views on which types of company need to strengthen stakeholder voices and how best the opinions of workers and customers can be better heard in the boardroom.Describing existing UK company law, and highlighting directors’ current responsibility to create successful businesses for the benefit of shareholders and with regard to a range of other interests, the review seeks views on how to ensure that all companies are taking the steps needed to understand and take account of wider interests and different social perspectives.Some of the methods for consideration here include advisory panels, designating non-executive directors to ensure stakeholder voices are heard and strengthening reporting arrangements around stakeholder voice.

Reactions to the employer voice proposals

While for some these approaches address concerns that a one-size-fits-all would be unworkable, for others they are a sign Theresa May has reneged on her pledge.Josh Hardie, CBI deputy director-general, responded favourably to the general approach. “Diversity of thought in a company helps improve decision-making and engaged employees are fundamental to business success. Businesses are already ensuring workers' voices are being heard in many effective ways.“While there is no blanket solution, a good starting point is firms being able to 'comply or explain' on the approach they are taking – whether that's employees on boards, employee committees, dedicated representatives, or another model.”However, while welcoming the government’s first steps in reforming executive pay and reviewing corporate governance, Charles Cotton, pay and reward adviser at the CIPD, the professional body for HR and people development, said Theresa May’s backtracking on her commitment was “disappointing”.Frances O'Grady, TUC general secretary, also expressed disappointment after Therasa May's speech announcing the terms of the review at the CBI annual conference, remarking: “This is not the way to show that you want to govern for ordinary working people."Responding to the launch of the paper today, Ms O'Grady confirmed this view, adding the proposals "will not do enough to shake-up corporate Britain".

Linking executive pay to long-term goals

The third aspect of the Corporate Governance Reform green paper opens up to debate how to increase shareholder influence over directors’ remuneration, including increasing transparency and simplifying and strengthening long-term incentive plans.Among questions the government is seeking views on are whether or not shareholders need extra powers to hold companies to account on executive pay and performance, and whether more needs to be done to encourage institutional and retail investors to make full use of their existing and any new voting powers on pay.“This is not about naming and shaming companies, but instead encouraging open conversations about what’s being rewarded and recognised at each grade, how, when and why,” responded Charles Cotton. “This is a win–win for business, as CIPD research shows that disproportionate levels of CEO pay is a huge issue for employees, with 59 per cent of employees citing it as a reason why they are demotivated at work.“Introducing a targeted binding vote regime would focus attention on the most concerning cases and give shareholders the teeth to truly have the final say on top executives’ pay,” said the CBI’s Josh Hardie.The review closes on 17 February 2017.

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