Directors' know how: what you should know about the upcoming changes

Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

Government published proposals for corporate governance reform

The Department for Business, Energy and Industrial Strategy (BEIS) has set out its plans to reform corporate governance in the UK. The proposed reforms reflect the feedback that the government received to its November 2016 consultation (you can read the QCA response here) and covers three main areas:

I.      Executive Pay

• All quoted companies will be required to report the pay ratio between the CEO and the average worker, and explain any year-to-year changes to that ratio, on an annual basis.
• The FRC will be invited to revise the UK Corporate Governance Code (the UK Code) to give remuneration committees a broader responsibility for overseeing pay and incentives across their company and require them to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy.
• The FRC will also be invited to revise the UK Code to extend the recommended minimum vesting and post-vesting holding period for executive share awards from three to five years.
• The Investment Association will be asked to implement its proposal of maintaining a public register of listed companies encountering shareholder opposition to pay awards of 20% or more, with a record of what these companies say they are doing to address shareholder concerns.

II.     Strengthening the employee, customer and stakeholder voice

• All private and public companies of significant size will be required to explain how their directors comply with the requirements of Section 172 of the Companies Act 2006 to have regard to employee and other interests.
• The FRC will be invited to consult on the development of a new Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important element in running a sustainable business.

  Operating under a "comply of explain" basis, companies would have to either assign a non-executive director to represent employees, create an employee advisory council, or nominate a director from the workforce.

• ICSA: the Governance Institute and the Investment Association will be asked to issue guidance on practical ways that companies can engage their employees and other stakeholders in their decision making process (more detail below).

III.     Corporate governance of large, privately-owned businesses

• The FRC will be asked to work with a number of membership bodies to develop a voluntary set of corporate governance principles for large, private companies.
• Companies of significant size will be required to disclose their corporate governance requirements in their Directors’ Report and on their website.

The government intends to bring the reforms into effect by June 2018, applying to company reporting years commencing on or after that date.

ICSA: The Governance Institute and the Investment Association publish guidance to help boards engage stakeholders more effectively during their decision-making process

Following the government’s request for industry guidance on strengthening stakeholder voices in the boardroom, ICSA: The Governance Institute and the Investment Association have issued guidance to help company boards consider how to understand and weigh up the interests of their stakeholders when making strategic decisions.

Although almost all companies will have some key stakeholders in common, such as employees and consumers, each company’s size, location and sector will influence the precise list, as well as the methods boards use to understand their stakeholders’ views.

Accordingly, boards should use the following ten core principles as a guide to engaging their key stakeholders:

1. Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why.
2. Boards should determine which stakeholders they need to engage with directly, as opposed to relying solely on information from management.
3. When boards are evaluating their composition and effectiveness, they should identify the stakeholder expertise needed in the boardroom and decide whether they have, or would benefit from, directors with directly relevant experience or understanding;
4. When recruiting any director, the nomination committee should take the stakeholder perspective into account when deciding on the recruitment process and the selection criteria;
5. The chairman – supported by the company secretary – should keep under review the adequacy of the training received by all directors on stakeholder-related matters, and the induction received by new directors, particularly those without previous board experience;
6. The chairman – supported by the board, management and the company secretary – should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders;
7. Boards should ensure that appropriate engagement with key stakeholders is taking place and that this is kept under regular review;
8. Companies should consider what would be most effective and convenient for the stakeholders, not just the company, when designing engagement mechanisms;
9. The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions; and
10. The board should provide feedback to those stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups.