8 March 2017 | By Holly Harkins Insight

Ready for reform?

Insight: Holly Harkins, CBI principal policy adviser on the value of business

Government plans for reform look set to bring higher expectations for corporate governance – it’s time to get ready

As we head into AGM season, the spotlight is shining firmly on corporate governance, particularly executive pay. Since Theresa May’s leadership bid in the summer of 2016, her Government has demonstrated real appetite for reform – from putting workers on boards to curbing excessive pay and setting a higher bar for the way in which large private companies are governed. So what is being proposed, and how can businesses start getting ready for change?

Executive pay

Two areas in the Government’s Green Paper stand out. The first is the proposal to introduce a requirement for companies to disclose the pay ratio between CEOs and the average worker. The Government’s rethink on mandating workers on boards along with pressure from investors may make it more likely that pay ratio disclosure will get the go ahead.

Pay ratios are fraught with difficulties. There is much debate over the meaningfulness of comparisons between companies as well as potential unintended consequences. To help, CBI argued in its response to the Green Paper that any introduction should include the use of contextual data and stick to data from the UK workforce. It will also be crucial to avoid the 300-page long guidance firms have to follow in to the US – ratios must be simple to produce.

The Government has also expressed appetite to give shareholders extra powers to hold firms to account on executive pay. Shareholders could be given another binding vote on pay, for example. The CBI argued that the Government’s intentions would be best served by focusing any additional binding votes on those companies that persist in making payments that shareholders regard as shocking, or out of line with company performance.

Stakeholder voice

“We’re going to have not just consumers represented on company boards, but employees as well,” Theresa May said when she launched her leadership bid in July 2016.

Although the Government has since reviewed making “workers” on boards mandatory, the green paper put forward several proposals for making sure that stakeholders – including employees, consumers and communities – are heard in the boardroom.

Speaking with CBI members, we’ve heard about plenty of good examples already in place – from employee forums to board subcommittees. The CBI wants to see the Government build on this good practice, extending existing reporting requirements, rather than imposing one specific model such as employees on boards, or giving non-executive directors new, specific responsibilities for stakeholder groups.

Private companies

Spurred on by high-profile media stories, the Government has proposed that the largest private companies should be subject to the same standards of corporate governance as publically listed companies and follow the UK Corporate Governance Code.

The CBI believes that the Government should adopt an approach that is proportional, avoids duplication for foreign-owned companies and wholly owned subsidiaries of PLCs. Any new approach also needs to be tailored to the needs of private companies, rather than simply transferring to private companies the system for publicly listed companies, which have different governance needs.

Is your business ready?

The reforms are only at green paper stage and the Government is currently reviewing how to refine the proposals, based on the feedback from the consultation. But the CBI would encourage businesses to start thinking now about what the proposals could mean for their businesses. With this in mind, we’ve compiled a checklist for boards of private and publicly listed companies:

Board checklist

All companies

  1. How are stakeholders already engaged across the business?
  2. To what extent does the board have visibility of this activity and any resulting information?
  3. Could your business demonstrate leadership by reviewing ways to strengthen existing approaches to stakeholder engagement at board level?

PLCs

  1. Continue to engage in constructive, meaningful dialogue with shareholders behind the scenes
  2. Companies with persistent levels of shareholder opposition to the Directors’ Remuneration Report – 25 per cent and above - should be placing a particular emphasis on step 1
  3. Start thinking about the internal ratio of CEO pay to average worker pay
  4. How are executive pay decisions framed in the context of wider decisions about pay across the business?
  5. How are wholly owned subsidiaries covered by current reporting arrangements?

Private companies

  1. Start thinking about approaches to corporate governance and disclosure – to what extent do approaches differ from what might be considered best practice?

Join the discussion