Understanding May’s corporate governance green paper

Corporate governance has been in the headlines frequently in 2016, as the BHS and Sports Direct scandals highlighted some of the poor practices that can occur behind closed doors at the UK’s most well known businesses.

Prime minister Theresa May responded to the public outcry earlier in the year, claiming that she would oversee large-scale changes to corporate governance guidelines in the country. She argued that the government would build an economy that “works for everyone, not just the privileged few”.

Last month, she unveiled the Corporate Governance Reform Green Paper, which is the culmination of the government’s efforts to ensure the right checks and balances are in place to prevent businesses behaving badly.

“For many ordinary working people – who work hard and have paid into the system all their lives – it’s not always clear that business is playing by the same rules as they are,” Ms May explained.

“And when individual businesses lose the confidence of the public, faith in the business community as a whole diminishes – to the detriment of all.”

But what changes has the green paper suggested? How have businesses, industry organisations and other stakeholders responded? And what are the government’s next steps?

A three-pronged approach

The green paper emphasised three areas that the government is keen to strengthen in order to improve the country’s corporate governance framework:

• Executive pay
• Governance at large, privately held businesses
• Strengthening the voice of employees, customers and suppliers

The government has urged stakeholders to consider a number of key questions and problems in these three areas.

For example, the paper revealed that CEO pay at FTSE 100 companies has quadrupled over the last 18 years, far outstripping the average increase in employee pay. Data suggests this rise in senior executive pay has not been matched by a proportional improvement in company performance.

The government is also keen to build better corporate governance in private businesses after acknowledging that most regulations and reporting standards only cover public companies. Yet, there are approximately 2,500 private companies and 90 limited liability partnerships in the UK that have more than 1,000 employees.

Finally, the paper describes the importance of having diverse opinions at the board level, with the general public needing more assurance that businesses are taking into consideration wider interests other than shareholder gains.

Proposed changes

The government has outlined various proposals to try and tackle these problems.

For executive pay, businesses could be forced to publish ratios that compare senior employees’ salaries with those of the wider workforce. Revisiting performance-related pay and providing shareholders with greater powers to control executive salaries are also options.

Meanwhile, private companies may be encouraged to sign up to a code of conduct to improve their behaviour. The UK Corporate Governance Code already exists for public companies, and it could be extended or updated to include private businesses.

Lastly, in terms of strengthening diversity on boards, the government has suggested the introduction of advisory panels that can provide wider viewpoints on key issues.

Another option is to designate existing non-executive directors as spokespeople that can provide independent input on stakeholder issues. The government is also considering stronger reporting requirements in this area.

Industry feedback

A number of organisations have provided early feedback on the green paper, including the Association of Chartered Certified Accountants (ACCA).

Jo Iwasaki, head of corporate governance at ACCA, said it is important to ensure the public’s expectations of proper boardroom behaviour don’t impede the UK’s competitiveness.

“In particular, proposals intended to encourage greater shareholder activism are to be welcomed provided these can be introduced in a balanced and proportionate way,” she stated.

“The proposed adoption of the UK governance framework by private companies is an interesting initiative, which should help encourage best practice.”

Think tank Tomorrow’s Company welcomed the green paper, claiming it put forward a number of “sensible policies”. The organisation highlighted the introduction of advisory panels as particularly meaningful.

Discussing executive pay, director of research at Tomorrow’s Company Laurie Fitzjohn-Sykes claimed pay ratios were a “crude instrument”, but he admitted they could encourage businesses to be more transparent when justifying salaries.

Nevertheless, Mr Fitzjohn-Sykes argued the paper currently has the wrong focus in trying to tackle events such as the BHS scandal, which he said makes up only a small minority of organisations.

“Encouraging business to take risks and invest will also prove a more effective means of restoring public trust than tackling a few bad apples,” he argued.

“People need to be inspired by companies that invest in pursuit of a purpose that delivers value to society. There are currently too few business leaders who have the courage to show this sort of leadership.”

Our 2016 Compensation and Market Trends Reports combine our review of the prevailing conditions in the corporate governance recruitment market together with the results of our latest employer survey.

Image: Mindscanner via iStock