UK Announces Corporate Governance Reforms

Martin Mortell is Director of Research, UK and Europe, at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Mortell.

On August 29, the UK Business Secretary Greg Clark has set out the British government’s plans for corporate governance reform, which are intended to “enhance the public’s trust in business”.

In the coming months, the government will introduce new legislation that will require:

  • Listed companies to annually publish and justify the pay ratio between CEOs and their average UK worker; and
  • All companies of a significant size to publicly explain how their directors take employees’ and shareholders’ interests into account.

Other non-legally binding measures will see all listed companies that receive greater than 20% shareholder opposition to executive pay packages having their names published on a new public register.

In addition, the Financial Reporting Council (“FRC”) will be asked to update the UK Corporate Governance Code to ensure that employees’ interests are better represented at board level. Under the Code’s “comply or explain” basis, firms will have to either (i) assign a non-executive director to represent employees; (ii) create an employee advisory council or (iii) nominate a director from the workforce.

The Institute of Directors has welcomed what it sees as a “pragmatic approach”, while critics have labelled the changes a watering down of the proposals that Prime Minister Theresa May made in 2016.

The current intention is to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date. As such, it will be 2019 before we see widespread reporting of CEO pay ratios, for example. In the interim, Glass Lewis analysts will be engaging with UK issuers on this and a variety of other governance topics.

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