Update on corporate governance reform

Following the Brexit referendum, and in anticipation of the UK’s new role as a global trading nation in its own right, the Government published on 29…

Following the Brexit referendum, and in anticipation of the UK’s new role as a global trading nation in its own right, the Government published on 29 November 2016 a green paper launching a consultation on aspects of corporate governance.

The stated aim of the consultation was to improve business performance and to consolidate the UK’s reputation as an attractive place in which to invest.

The consultation closed on 17 February 2017, and the Government has now published its response.

What does the response say?

Not unexpectedly, many of the recommendations focus on executive remuneration and the protection at board level of employees’ interests. They include measures to broaden the role of the remuneration committee, to encourage companies to respond appropriately to shareholder opposition to executive pay awards, and to extend holding periods for incentive shares to encourage a longer-term view of financial performance. Also under consideration are requirements to publish the ratio of CEOs’ pay to the workforce average, and for greater clarity on the value of share awards dependent on a range of hypothetical company results.

Aren’t the prospective reforms relevant only to listed PLCs?

Corporate governance, as monitored by the Financial Reporting Council (FRC) though the UK Corporate Governance Code (Code), is most closely associated with listed public companies. The outcome of the consultation goes further, however, to encompass large privately-held companies. The Government recognises that the manner in which such companies are managed has a significant influence on the UK’s competitive standing, warranting greater transparency of their directors’ behaviour.

For these purposes, the Government has suggested that a private company should be considered “large” if it has more than 2,000 employees.

The starting point for the enhanced governance of large private companies is the “overarching” duty of directors of all companies under section 172 Companies Act 2006, to act with regard not merely to the company and its body of shareholders, but also to the interests of the company’s employees, suppliers, customers and other non-shareholders with an interest in the company’s performance.

Proposals for large private companies include:

  • Secondary legislation to require each company to explain how its board complies with section 172;
  • An invitation to the FRC to work with the Institute of Directors, the Confederation of British Industry, the Institute for Family Business and the British Private Equity & Venture Capital Association, to develop a voluntary code of corporate governance; and
  • Secondary legislation to require each company to disclose, in its Directors’ Report and on its website, how it complies with this voluntary code or, if it does not, to justify non-compliance.

How and when will reforms be implemented?

The measures eventually adopted will be delivered by a combination of strengthening the Code, which is the responsibility of the FRC, and secondary legislation, to be tabled by the Government. The FRC is expected to launch a consultation in the late Autumn on appropriate Code revisions; the Government intends to present draft secondary legislation to Parliament before March 2018.

The Government’s current intention is that reforms will take effect in June 2018.

If you have any questions about the prospective reforms, please speak to your usual advisor in the Weightmans corporate team, or otherwise speak to your usual Weightmans contact.

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