TUC general secretary Frances O’Grady described the proposal as “feeble…, spelling business as usual for boardrooms across Britain”, while Sir Vince Cable, leader of the Liberal Democrats, declared, “The overblown rhetoric from Theresa May is completely at odds with the weakness of the new rules”.
But the business community has heaved a collective sigh of relief as some of the tougher measures – including the requirement for an employee director on the board and annual binding votes on executive pay – that were proposed in the original Green Paper last year, have been dropped.
“We welcome the pragmatic approach the government is taking to improve how company boards work,” said Institute of Directors director general Stephen Martin, while Stefan Stern, director of the High Pay Centre think tank, called it “a step in the right direction, providing greater transparency and focusing the public’s attention on those companies who ignore the concerns of their shareholders”.
The reform package now focuses on three main elements. The first will require all listed companies to reveal and justify the pay ratio between chief executives and the average worker.
Companies of a certain size will all have to explain publicly how their directors take employees’ and shareholders’ interests into account, while all large companies will also have to make their responsible business arrangements public.
The second element will see those listed companies with significant (20%) shareholder opposition to executive pay packages listed on a new public register, which will be run by the Investment Association.
The Association, which represents UK investment managers, hailed the move as “an important step in increasing accountability and transparency of those listed companies that see significant shareholder rebellions during the agm season”.
CEO Chris Cummings said, “Our members, who manage the pensions of 75% of UK households and own over one third of the FTSE, believe that not all company boards that receive big shareholder dissent are currently doing enough to address investor concerns.
“This public register will help sharpen the focus on the those who must do more, enabling our members to hold the country’s biggest businesses to account and leading to better-run companies.”
The third area will see new measures introduced to ensure employees’ voices are heard in the boardroom.
The government is leaving the Financial Reporting Council to come up with how best to achieve improved employee representation by introducing a new requirement to the corporate governance code.
It suggests that on the comply or explain basis, companies would have to: assign a non-executive director to represent employees; create an employee advisory council; or nominate a director from the workforce.
The package also contains a proposal to extend the scope of the corporate governance code to cover large private companies. The FRC will consult with government and the business community to help develop a voluntary set of corporate governance principles for large private companies.
Business secretary Greg Clark believes that the reforms will build on the UK’s strong reputation for being in the forefront of high quality corporate governance. He added that they would “ensure our largest companies are more transparent and accountable to their employees and shareholders”.The reforms requiring legislation will be implemented by June 2018. However, the register of companies with significant shareholder opposition will be launched by the end of this year.