Where next for governance and reporting?

Transcription

1 Briefing Note: Government Response to Governance Green Paper 07 November 2017 Where next for governance and reporting? Ever since the high profile corporate scandals at BHS and Sports Direct, a key debate among companies, regulators and the Government has focused on how reforms to corporate governance can be used as a tool to re-build trust in business and promote investment in the British economy post-brexit. Indeed, corporate governance reform was a central plank of Theresa May s bid to become prime minister and it has remained an important part of her agenda, even following the disruption of the 2017 General Election. The form that these reforms will take and the role that reporting will play in the Government s plans are issues of key importance for our clients.

2 We are beginning to see the shape that reform will take and what this will mean for corporate reporting. Over a year on from the inquiry into BHS that first brought the governance debate to prominence, we are beginning to see the shape that reform will take and what this will mean for corporate reporting. On 15th August, the Financial Reporting Council (FRC) published draft amendments to the Guidance on the Strategic Report. The main objectives of this update are to implement changes resulting from the Non-Financial Reporting Directive (NFRD), to strengthen the link with stakeholders and section 172 of the Companies Act and to make targeted improvements in other areas of reporting. Value creation, long-termism, stakeholders, linkages and materiality emerged as clear themes in the draft guidance. Clear direction of travel Further clarification of the direction of travel came on 29th August with the publication of the Government s response to its Green Paper consultation on corporate governance. Reporting looks set to be a key element of the Government s strategy with proposals for new legislation introducing a formal requirement to report on how directors comply with the requirements of section 172 to have regard for employees and other stakeholders. There is also a proposed new requirement for companies to report annually on the ratio of CEO pay to the average pay of their UK workforce and to provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes. The focus on section 172 in the Government's paper clearly complements both the FRC s approach to updating the Guidance on the Strategic Report and the findings of the House of Commons BEIS select committee inquiry into corporate governance which were published in April. It is clear that the Government will expect the FRC to take responsibility for implementing much of its agenda through non-legislative measures, notably through amendments to the UK Corporate Governance Code, which the FRC is expected to consult on by the end of November Despite some targeted changes to secondary legislation, the Government is clearly taking a collaborative approach to the reforms, inviting industry bodies, such as the Investment Association and the Institute of Chartered Secretaries and Administrators (ICSA), to work together to develop guidance to promote good practices and restore trust. The Government s report has come up with 9 key proposals it intends to take forward. These include: 1. Inviting the FRC to revise the Corporate Governance Code to: - Be more specific about the steps that premium listed companies should take when they encounter significant shareholder opposition to executive pay policies and awards. - Give remuneration committees a broader responsibility for pay across the entire company and require them to engage with the wider workforce on executive remuneration. - Extend the recommended minimum vesting and post-vesting holding period for executive share awards from 3 to 5 years to encourage companies to focus on longer-term outcomes in setting pay.

3 The Government will introduce new legislation requiring companies to report on section Introducing secondary legislation to require quoted companies to: - Report annually on the ratio of CEO pay to average pay of their UK workforce, along with narrative explaining changes to that ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce. - Provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes. 3. Inviting the Investment Association to maintain a public register of listed companies encountering shareholder opposition to pay awards of 20% or more, along with a record of what these companies say they are doing to address shareholder concerns. 4. Introducing secondary legislation to require all companies of significant size (private as well as public) to explain how their directors comply with the requirements of section 172 to have regard to employee and other interests. 5. Inviting the FRC to consult on the development of a new Code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business. - The Government will invite the FRC to consider and consult on a specific Code provision requiring premium listed companies to adopt, on a comply or explain basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce. 6. Encouraging industry-led solutions by asking ICSA (the Institute of Chartered Secretaries and Administrators: The Governance Institute) and the Investment Association to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders. - The Government will also invite the GC100 group of the largest listed companies (FTSE 100 General Counsels) to complete and publish new advice and guidance on the practical interpretation of the directors duties in section 172 of the Companies Act Inviting the FRC to work with the IoD, the CBI, the Institute for Family Businesses, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for large private companies under the Chairmanship of a business figure with relevant experience. 8. Introducing secondary legislation to require companies of a significant size to disclose their corporate governance arrangements in their Directors Report and on their website, including whether they follow any formal code. - This requirement will apply to all companies of a significant size unless they are subject to an existing corporate governance reporting requirement. - The Government will also consider extending a similar requirement to Limited Liability Partnerships (LLPs) of equivalent scale.

4 We are moving towards a focus on 'how a company does its business'. For further information please contact smyles@blacksunplc.co m or your account management team. We will continue to provide updates on the upcoming changes to corporate governance and reporting as the debate continues. 9. The Government will ask the FRC, the Financial Conduct Authority and the Insolvency Service to conclude new or, in some cases, revised letters of understanding with each other before the end of this year to ensure the most effective use of their existing powers to sanction directors and ensure the integrity of corporate governance reporting. - The Government will also consider, in light of this work, whether further action is required. Shift in approach It's clear from these changes and those on the horizon that the regulatory environment moving forward will be much more focused on how a company does its business and value creation issues, such as the integrity of the Board, culture of the organisation, and broader stakeholder concerns. This may signal a pendulum shift in approach, to one which is more focused on long-term sustainable value creation. Opportunity for Boards Companies should see these reforms and the reporting process more generally, as an opportunity to put stakeholder and value creation issues firmly on the Board s agenda. We hope that Boards in turn will use this as an opportunity to set themselves the challenge of aligning business decisions with purpose and values, by embedding the right culture within the business to help support long-term term strategic goals. We hope that, over the long-term, this will contribute to the overall success of UK business, creating an environment which investors can depend on as well as more sustained growth in the UK economy. Sallie Pilot Director spilot@blacksunplc.com

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