On 29 November 2016, the Department for Business, Energy and Industrial Strategy (“BEIS”) issued a Green Paper on Corporate Governance and Executive Pay. The consultation has arisen as a result of the general discontent with the continuing rise of executive pay, and the widespread resentment of the questionable practices of some private company owners such as those associated with the collapse of BHS.
The introduction to the Green Paper aligned with the Prime Minister’s ambition to “build an economy that works for everyone, not just the privileged few”. She went on to say that whilst she strongly believes in the power of business, “big business must earn and keep the trust and confidence of their customers, employees and the wider public.” Thus, the “Green Paper sets out a new approach to strengthen big business through better corporate governance”.
The Green Paper sets out a number of options for reform in the following three areas: executive pay; strengthening the employee, customer and wider stakeholder voice; and corporate governance in large privately-held businesses. The consultation period ends on 17 February 2017. The timing thereafter is uncertain but it is assumed that the Government response, setting out more detailed proposals, will be issued towards the end of Spring 2017.
Set out below is a summary of the questions raised in the Green Paper with a brief mention of the alternatives suggested.
Shareholder voting rights:
Do shareholders need stronger powers to improve their ability to hold companies to account on executive pay and performance?
Five options are considered including making all or some elements of the executive pay package subject to an annual binding vote; introducing stronger consequences for a company losing its annual advisory vote; requiring companies to set out an upper limit on total annual pay in their policy; a more frequent binding vote on policy; and providing greater specificity on how companies should engage with shareholders on pay.
Shareholder engagement on pay:
Could more needs to be done to encourage institutional and retail investors to make full use of their existing and any new voting powers on pay?
The Green Paper suggests mandatory disclosure of fund managers’ voting records at AGMs. It also considers the establishment of “senior shareholder committees” to scrutinise remuneration and other key corporate issues, but recognises the difficulties of introducing this.
The role of the remuneration committee:
Do steps need to be taken to improve the effectiveness of remuneration committees, and their advisers, in particular to encourage them to engage more effectively with shareholders and employees?
The paper suggests that the existing provision to take account of the views of the workforce and shareholders be strengthened to require consultation with both groups in advance of the preparation of pay policy.
Should a new pay ratio reporting requirement be introduced and should the existing, qualified requirements to disclose the performance targets that trigger annual bonus payments be strengthened?
The idea of disclosing a CEO to median employee pay ratio has already been suggested by a number of investors as has the suggestion to strengthen the disclose of bonus targets.
Long-term incentive plans (“LTIPs”):
How could long-term incentive plans be better aligned with the long-term interests of quoted companies and shareholders?
The possibility of introducing restricted share schemes to replace traditional LTIPs; the extension of the minimum vesting period from three to five years; and a mandatory executive shareholding requirement of 200% of gross salary are all explored.
Strengthening the employee, customer and wider stakeholder voice:
Consideration is given as to whether the way in which the interests of employees, customers and wider stakeholders are taken into account can be strengthened.
This is probably the area that has received most comment since the Prime Minister first suggested it. Options include a stakeholder advisory panel for directors to hear directly from their key stakeholders; the possibility of having employee representation on the Board; or the designation of non-executive directors to provide an independent voice for key interest groups.
Large privately-held businesses:
This is a new area of focus exploring the possibility of extending listed company corporate governance to private companies.
The Government believes that it is important to consider whether similar standards of corporate governance should apply to at least some privately owned businesses to provide confidence to key stakeholders.
There are potentially some radical suggestions under consideration by the Government, and the document gives individuals and organisations an opportunity to comment on the options proposed. It’s now time to get your thinking hats on and help shape the Corporate Governance landscape for 2017 onwards.
The Green Paper is available from this link.