On 29 November 2016, the Government published a Green Paper on corporate governance reform with the aim of seeking views on what changes might be appropriate to help ensure that the economy "works for everyone".  The Green Paper considers three specific aspects of corporate governance where the Government believes that there could be particular scope to build on and enhance the current framework. 

The three areas under consideration are:

Executive pay:

In relation to executive pay, the Government has put forward a number of options on which it is inviting comment. The options relate to:

  • Shareholder voting and other rights including making some or all elements of pay subject to a binding shareholder vote; retaining the advisory vote on the remuneration report but imposing stronger consequences on companies that lose the vote; requiring an upper pay threshold which, if breached, would require a binding shareholder vote; requiring a binding shareholder vote on the remuneration policy to be held more frequently than once every three years; and, providing stronger guidance on how companies should meet their obligations to shareholders when deciding on pay.
  • Shareholder engagement on pay including mandatory disclosure of fund managers' voting records at AGMs and the extent to which they use proxy votes; establishing a senior shareholder committee to engage with executive remuneration arrangements; and, considering ways to facilitate or encourage individual shareholders to exercise voting rights on pay and other corporate decisions.
  • Role of remuneration committees including requiring the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy; and, requiring the chairs of remuneration committees to have served for at least 12 months on a remuneration committee before taking up the role.
  • Transparency in executive pay including publishing the pay ratio between the CEO pay and pay in the wider workforce; and, strengthening the requirements in respect of the disclosure of bonus targets.
  • Long-term executive pay incentives including the use of non-performance related share options or restricted stock (granted at much lower amounts than current levels); requiring share options to be held for a minimum of five years; and, requiring shares obtained as remuneration to be retained until the executive has built up a holding of two times salary.

Strengthening the voice of employees, customers and other interested parties:

In relation to strengthening the voice of employees, customers and other parties, the Government has put forward suggestions in a number of areas:

  • Creating stakeholder advisory panels this would allow directors to hear directly from key stakeholders and could operate in a number of different ways including both pro and re-actively.
  • Designating existing non-executive directors to ensure that the voices of key interested groups, especially that of employees, is being heard at board level this would be a means of directly inputting the voice of key interested groups into boardroom discussions without adding to boardroom size.
  • Appointing individual stakeholder representatives to company boards this is a suggestion only and the Green Paper makes it clear that it is not proposing to mandate direct appointments of employees or other stakeholders to company boards
  • Strengthening reporting requirements related to stakeholder engagement this includes strengthening reporting requirements on how directors have performed their duties in the annual Strategic Report.

Strengthening corporate governance in large privately-held businesses:

The Government is also considering whether, and to what extent, the UK’s largest, privately-held businesses should meet higher minimum corporate governance and reporting standards. Options put forward include:

  • Applying enhanced standards of corporate governance more widely including extending the UK Corporate Governance Code to these companies or introducing a separate governance code for which could draw on existing codes but which would meet the needs and challenges faced by privately-held businesses.
  • Applying reporting standards more consistently including reporting requirements applied on the basis of a size threshold (e.g. number of employees, turnover etc.) rather than on the legal form of the business.

Responses to the Green Paper must be submitted by 17 February 2017.

A copy of the Green Paper can be found here.