The UK Government has published proposals for corporate governance reforms to enhance the public’s trust in business. In particular, the reforms consider the publication of pay ratios between bosses and workers and new measures to ensure that the employee’s voice is heard in the boardroom.
The first section of the report looks at the plans for reform in relation to executive pay, after persistent concerns in the investment community and wider society over very high levels of executive remuneration at UK quoted companies. Whilst there were various proposals put forward by the government in November last year, one of the key areas involved the publication of pay ratios’ by quoted companies. Those opposed to the publication of pay ratios were concerned that they can lead to misleading comparisons between companies in different sectors and also potentially incentivise companies to offshore or outsource lower paid employees to provide a better balanced pay ratio. The Government has, however, confirmed that it will introduce legislation to require quoted companies to report annually in their remuneration report, the ratio of CEO pay to the average pay of their UK workforce, along with a narrative explaining changes to that ratio from year to year and how the ratio relates to pay conditions across the wider workforce. This increases the reporting requirements on UK companies who have already had the new Gender Pay Gap Reporting Regulations introduced in May this year. As with that requirement, the narrative accompanying any publication of pay ratios will be key, as well as the internal and external communications to avoid damaging the company’s reputation from any misleading comparisons between different industry sectors. It will be interesting to see if the increased reporting obligations will have the result of “pushing down” executive pay or whether it will result in increased competition between companies to retain their key executives.
Other proposals have also been made in relation to ensuring that remuneration committees and companies address significant shareholder dissent on executive pay, such as establishing a public register of listed companies encountering shareholder opposition of 20% or more to executive pay and giving remuneration committees a broader responsibility for overseeing pay and incentives across the company. In addition, the Government will not abolish Long Term Incentive Plans, but will require quoted companies to provide a clearer explanation in their remuneration policies of the range of potential outcomes from complex, share based incentive schemes, encouraging a more flexible and tailored approach to linking executive remuneration to long term company performance. The Government also proposes that the minimum holding period for share based remuneration should be increased from three to five years.
One of the other areas covered in the Government response is in relation to strengthening the employee, customer, and wider stakeholder voice. Section 172 of the Companies Act 2006 already requires the directors of a company to have regard to these wider interests in pursing the success of the company, but many respondents felt that this aspect of the current legal framework could be improved. The UK does not have employee representation at board level in the same way as some other jurisdictions and the Government does not propose to enforce any one particular method of increasing employee and other stakeholder representation, preferring instead to require companies to adopt on a “comply or explain” basis, one of three employee engagement mechanisms. These include: appointing a designated non-executive director; adopting a formal employee advisory council; or appointing a director from the workforce. Whilst this particular suggestion would currently apply to listed companies only, the Government intends to introduce secondary legislation to require all companies of significant size to explain how their directors comply with the requirements of section 172.
The Taylor review of Modern Working Practices published in July highlights the importance of having an effective worker voice in making people feel better about their work. It also sets out some proposals in relation to encouraging the “worker voice” in the workplace, such as examining the effectiveness of the Information and Consultation Regulations 2005 in improving employee engagement in the workplace. In addition, it suggests that the Government should work with certain organisations to promote the development of better employee engagement, especially in sectors with significant levels of casual employment. The Government has indicated that it will consider these suggestions and respond to the whole report later in the year.
With the proposals regarding pay ratios intended to come into effect in June next year and a draft statutory instrument setting out further details to be published later this year, companies should start to consider how such information will be collected, how they will publish that information and what communications are required to avoid damaging the company’s reputation.