• International Workplace
  • 12 September 2017

New corporate governance reforms to increase boardroom accountability

Business Secretary, Greg Clark, has set out how the Government’s package of corporate governance reforms will enhance the transparency of big business to shareholders, employees and the public.

In the coming months, the Government will introduce new laws to require:

  • around 900 listed companies to annually publish and justify the pay ratio between CEOs and their average UK worker;
  • all companies of a significant size to publicly explain how their directors take employees’ and shareholders’ interests into account; and
  • all large companies to make their responsible business arrangements public.

Last year the Prime Minister made clear that the behaviour of a small number of companies had damaged the public’s trust in big business. She set out proposals to improve transparency and accountability and give employees a voice in the boardroom. The reforms announced on 29 August follow a thorough consultation process.

Business Secretary, Greg Clark, said:

“One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business. Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world.

“We have maintained such a reputation by keeping our corporate governance framework under review. Today’s reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.”

The Business Secretary will seek to ensure employees’ interests are better represented at board level of listed companies. He will ask the Financial Reporting Council (FRC), which sets high standards of governance through the UK Corporate Governance Code, to introduce a new requirement in the code to achieve this.

Under the code’s ‘comply or explain’ basis, firms would have to either:

  • assign a non-executive director to represent employees;
  • create an employee advisory council; or
  • nominate a director from the workforce

The FRC will also be asked to work with the business community and the Government to develop a voluntary set of corporate governance principles for large private companies.

Stephen Haddrill, CEO of the FRC, said:

“The UK’s deserved reputation for good corporate governance, earned over the last 25 years, has underpinned British business success. How we develop the framework will be key to boosting competitiveness, transparency and integrity in business particularly after Brexit. Successful and sustainable business are not just good for the economy, they support wider society by providing jobs and helping to create prosperity.

“The FRC is undertaking a fundamental review of the Corporate Governance Code. The Government’s feedback will help inform the development of our consultation later this year.

“Large private companies are integral to the UK economy as significant employers and supporters of communities and families. It is right that we develop a set of corporate governance principles to enhance confidence that they act in the public interest.”

The Government intends to bring legislative reforms into effect by June 2018.

Responding to the Government’s responsible business reforms, Stephen Martin, Director General of the Institute of Directors, said:

“The Secretary of State is taking a sensible approach on giving workers a bigger say, by allowing companies to choose the best way to implement the new rules. All directors are responsible for the whole company, so any with the specific remit to speak for employees must be adequately trained and aware of their responsibility to promote the long-term success of the business.

“Pay ratios will sharpen the awareness of boards on the issue of remuneration, but they can be a crude measure. Companies will have to prepare themselves to explain how pay as a whole in their business operates, and why executives are worth their packages.”