BEIS issues Green Paper on Corporate Governance

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29 Nov, 2016

The Department for Business, Energy & Industrial Strategy (BEIS) has issued a Green Paper seeking views on how to improve the UK corporate governance framework and setting out options for updating the framework and reforming executive remuneration. The consultation closes on 17th February 2017.

The Green Paper asks for views on:

  • executive pay;
  • strengthening the employee and customer voice; and
  • corporate governance in large private businesses. 

Executive pay 

Executive pay is the largest section of the Green Paper. Key areas include shareholder voting and other rights, shareholder engagement on pay, the role of the remuneration committee, transparency in executive pay and long-term incentive plans. 

The Green Paper proposes a number of options to the voting regime on director’s remuneration. These include making all or some elements of executive pay subject to a binding vote, introducing stronger consequences for companies losing the annual advisory vote, requiring companies to set an upper threshold for total annual pay to trigger a binding vote and increasing the frequency of the existing binding vote on remuneration policy. There is also an option of strengthening the UK Corporate Governance Code to provide more guidance on how companies should engage with shareholders on pay and what to do in the case of significant shareholder opposition to the remuneration report. 

The Green Paper also considers shareholder engagement on pay. The main options are mandating the disclosure of fund managers’ voting records at AGMs and the extent to which they have made use of proxy voting; establishing senior shareholder committees to engage with executive remuneration arrangements and considering ways to facilitate or encourage individual retail shareholders to exercise their rights to vote. 

Two main options are mentioned regarding the constitution and role of the remuneration committee. The first one is requiring the remuneration committee to consult shareholders and the wider workforce before preparing the executive pay policy and the second is requiring the chairs of remuneration committees to have served for at least 12 months on a remuneration committee before taking up the role of chair. 

On transparency in executive pay, the Green Paper includes an option for listed UK companies to include the ratio of CEO pay to median employee pay in the remuneration report each year, and the context behind that ratio. The government also includes an option to require the disclosure of bonus targets. 

The government is also seeking views on whether long-term incentive plans could be brought more in line with the long term interests of the company. 

Strengthening the employee and customer voice

The Green Paper covers four options for strengthening the stakeholder voice. The options include the introduction of stakeholder advisory panels, designating existing non-executive directors to provide an independent and clear voice for key interested groups as a formal part of the board structure, and appointing individual stakeholder representatives to company boards. There is also an option to strengthen reporting requirements related to stakeholder engagement, for example further guidance on preparation of the Strategic Report to include how directors have performed their duties under section 172 of the Companies Act 2006.

Corporate governance in large private businesses 

The third and final area of the Green Paper considers whether the largest private companies should be held to higher standards of corporate governance and reporting. The options include extending the voluntary approach currently applying to listed companies and using a bespoke code for unlisted companies (the paper acknowledges that some private companies already use the Corporate Governance Guidance and Principles for Unlisted Companies in the UK issued by the Institute of Directors). An example threshold of 1000+ employees is suggested but the consultation covers whether this is an appropriate cut off level. The options also explore whether further non-financial reporting requirements, such as on greenhouse gas emissions and executive remuneration, should also apply to privately held businesses.

The press release and the Green Paper are available on the BEIS website.  Our related Governance in Brief publication is available here.

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