Theresa May’s corporate governance reforms
A political climbdown but a step forward for responsible business
Yesterday’s long-awaited corporate governance reforms fall far short of the government’s original aim of ‘establishing the best corporate governance of any major economy’. As expected, Theresa May’s more controversial proposals – worker representation on company boards and binding annual shareholder votes on executive pay – have been dropped. But while it is true that the reforms lack teeth, they will increase transparency and encourage companies to hold up the mirror. In particular, following the collapse of BHS, these reforms shine a new spotlight on the corporate governance of private companies, where most of the focus since the financial crisis has been on listed companies and banks.
What made the cut? The Government’s measures include nine headline proposals for reform across three areas: executive pay, strengthening the employee, customer and supplier voice and corporate governance in large privately-held businesses. Most notably, the proposals will:
- Require listed companies to report annually on the ratio of CEO pay to the average pay of their workforce
- Establish a public register of listed companies encountering shareholder opposition to pay awards of 20% or more
- Invite the Financial Reporting Council (FRC) to consult on revisions to the UK Corporate Governance Code to strengthen the voice of employees at board level
- Introduce secondary legislation to require companies of a significant size to disclose their corporate governance arrangements in their Directors’ Report
While the reforms have done nothing to increase the prime minister’s popularity in political circles – with the left describing them as ‘feeble’ and the right as ‘flirting with anti-capitalism’ – in the main, they have been well received by investors and industry bodies. With public trust in business at an all-time low and a greater scepticism in government of the private sector, these measures are the latest in a series of mandatory non-financial reporting requirements – from modern slavery to gender pay – designed to embarrass companies into positive change. The dilution of the initial proposals reflects a nervousness in government of legislative prescriptions, hence their preference to name and shame. Theresa May likes to position herself as the champion of responsible business but, in reality, this agenda is being driven by more players than just this government. Investors, employees and consumers all have increased expectations of businesses to have transparent and fair corporate governance structures. This is not just a reputational issue, it is about corporate resilience and sustainability.
With the government setting out its intention to lay any draft secondary legislation on the reforms before Parliament by March 2018, political and media debate on the detail of these measures is likely to continue over the months ahead. In addition, the Financial Reporting Council, who have been tasked by the government with taking a number of these proposals forward, will consult on the UK Corporate Governance Code in the late autumn. The government’s current aim of bringing these reforms into effect by June 2018, will mean that companies reporting on that date or afterwards, will need to consider whether they have the structures in place to comply sooner rather than later.
While these reforms fail to deliver on the promises set out by Theresa May last summer, they follow a direction of travel on corporate governance and sustainability that will continue to gain momentum. Innovative companies are making a strategic decision to go beyond compliance and show leadership on a broad range of corporate governance and sustainability issues, from diversity and inclusion to modern slavery and the environment. Doing so not only allows businesses to strengthen their brand appeal and relationships with government but demonstrates to investors that they take their responsibilities to their employees, customers and supply chain seriously.