What is the Corporate Governance Reform and who will be affected?

The Reform will affect both public and private limited companies, if they meet the certain thresholds explained below.

What changes do companies need to be aware of?

Engaging with employees:

All companies with 250+ employees must include, within their director’s report, a statement on what steps the company has taken to engage with their employees and how the directors have had regard for employee interests.

Engaging with customers and suppliers:

If at least two of the following criteria are met:

• The company has turnover of more than £36million; 
• The company has a balance sheet of more than £18million; or
•  The company has 250+ employees.

Directors need to include a statement summarising how they have had regard for the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company during the financial year.

Promoting the company’s success:

If the company meets two of the above criteria they will have to include a statement setting out how the directors have promoted the success of the company in accordance with s.172 of the Companies Act. A director must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

Compliance with the Governance Code:

Any companies with 2,000 or more employees, or which have both a turnover of more than £200 million globally and a balance sheet total of over £2 billion globally, will be required to supply a statement setting out the corporate governance arrangements of the company, including which corporate governance code they follow, and any departures from the code.

Pay-Ratio:

Companies listed on the London Stock Exchange or a recognised stock exchange in the European Economic Area, the New York Stock Exchange or Nasdaq and with 250+ employees will be required to publish, within the directors’ remuneration report, their pay ratio information showing the CEO's total remuneration relative to the 25th, 50th and 75th percentile of full-time equivalent remuneration of the company's UK employees.

Here is an example from the government:

Step 1:

Determine the individual pay and benefits (based at a minimum on wages and salary) for every UK employee of the company, for the financial year being reported on in the Directors’ Remuneration Report.

Step 2:

Rank the pay and benefits of all UK employees from lowest to highest, and identify the employees at the 25th, 50th and 75th percentiles.

e.g. At company X, the CEO’s Single Total Figure of Remuneration (STFR) reported in this remuneration report is £1.3million, and the UK employees identified at each of the three percentile points are paid the following:

Step 3:

Calculate the pay ratios by dividing the CEO’s Single Total Figure Remuneration (X) with employee pay and benefits at each of those percentile points (Y). (X/Y:1)

Ratio of CEO STFR to the 25th percentile: £1,300,000/23,000 = 57:1

Ratio of CEO STFR to the Median (50th) percentile: £1,300,000/45,000 = 29:1

Ratio of the CEO STFR to the 75th percentile: £1,300,000/60,000 = 22.1

We can help

If you have any questions about the Reform, or are not sure what your company will be required to do following the Reform, please feel free to email me [email protected] or call on 01206 217326.