Corporate governance - your company's obligations

Corporate governance concerns the rules, processes and laws by which public listed companies must abide. The purpose of these rules is to facilitate good management of a company with a view to long term success. On 29 November 2016 the Department for Business, Energy and Industrial Strategy (BEIS) published a green paper focusing on corporate governance reform. The main theme of the green paper was to look at whether the current regime for corporate governance was fit for purpose.

The paper focused on three main aspects of executive pay, the voice of employees and customers, and corporate governance in larger private businesses. The most prominent theme of the response is “transparency” and it is clear from those who responded that this is what is needed in all three areas.

Looking first at executive pay, there has been dissatisfaction following the introduction of new controls over executive remuneration in quoted companies in 2013. These reforms gave binding votes to shareholders on pay policy, but, despite these reforms, the BEIS response states that there continues to be a disregard of shareholder opinions on pay. With a view to tackling this issue, the Government intends to invite the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code in order to assist companies in dealing with shareholder opposition and put more pressure on companies to show what it is that they are paying their top executives. There is also a recommendation of introducing pay ratios which will highlight the difference in executive pay and the average employee’s pay.

The second area looks at the voice of employees and customers of companies. The Government’s intention here is to again invite the FRC to introduce new principles, this time to emphasise the importance of the voices of employees, customers and wider stakeholders and not the views of those at management level. BEIS states that directors should be under an obligation to show how they are complying with their obligations to have regard to employees and other interests. The general consensus of the responses to the green paper was that companies should do more to strengthen these voices which would in turn promote long-term stability.

Thirdly, the response looks at corporate governance in large privately held businesses. The green paper consultation highlighted “broad support” for standards to be set for this type of business, irrespective of its legal status. The Government suggests these companies develop a voluntary set of principles and also suggests introducing secondary legislation to require disclosure of corporate governance arrangements on company websites. The Government is also considering extending a similar requirement to Limited Liability Partnerships.

If you are in any doubt as to your company’s obligations in respect of corporate governance or compliance with company law then please do not hesitate to contact us. I am based at our Colchester Office and can be reached on 01206 217 366 or [email protected].