· 2 min read · Features

Corporate governance green paper: A deeper dive

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The government has released a green paper exploring the viability of workers on boards, pay ratios and corporate governance standards

Back in the summer Theresa May vowed to curb boardroom excesses. To increase employee and other stakeholder confidence in big business she raised the issue of workers sitting on boards during her leadership campaign, and reiterated her commitment during her Conservative Party conference speech. Since then she has back-pedalled following concerns from business leaders, including the CBI and IoD, that the procedure could be unworkable in UK companies.

Last week the government released a watered-down version of these and other commitments in its green paper, a discussion document on corporate governance reform. Its aim is to consider changes in the corporate governance regime to help ensure the economy works for everyone and in particular:

  • Giving greater voice to employees and consumers in the boardroom
  • Measures that increase the connection between boardroom directors and other interested groups such as employees and small suppliers
  • Options for increasing shareholder influence over ensuring executive pay is aligned to long-term performance; and
  • Considering whether features of governance standards for listed companies should be extended to the largest privately-held companies.

A poll published by the TUC on the same day as the green paper found that 59% of people support the election of worker representatives onto the boards of large companies. Only 10% opposed the idea.

Even so, the appointment of individual workers (or other stakeholder representatives such as consumers) to company boards, although widely publicised earlier this autumn, is now only one of three options in the green paper for strengthening stakeholder voice at boardroom level. The government has now raised concerns over their likely effectiveness and the constraints of boardroom confidentiality. Alternatives are the establishment of advisory panels that could be consulted on executive remuneration policy, or the appointment of designated non-executive directors to take formal responsibility for articulating particular stakeholder perspectives.

In considering the shareholder influence over executive pay in PLCs the government is asking for views on a range of options aimed at encouraging greater shareholder engagement with executive pay; improving transparency on executive pay and strengthening the role of remuneration committees, including improved engagement with shareholders and employees. The government is lukewarm on the headline issue of publishing ratios comparing CEO pay to average pay, as such figures could be misleading or misconstrued.

In a move welcomed by the IoD (which sees corporate governance of unlisted companies as currently "a bit of a black box") the government is also seeking views as to whether features of governance standards for publicly listed companies should be extended to the largest privately-held companies or LLPs. They are not required to meet the same formal corporate governance and reporting standards as PLCs because ownership and control are usually interlinked.

By contrast, in PLCs the owners or shareholders are distant from the executives running the company but this could also apply to large private companies. Consequences when things go wrong can be equally severe for other stakeholders, such as employees, (as seen at BHS or Sports Direct). In terms of the scope and size of business to which corporate governance could apply, reference is made to the £36 million turnover required under the Modern Slavery Act for disclosing steps taken in their own business and supply chains to combat modern slavery, and the gender pay gap reporting requirements that are due to apply to employers with 250 employees or more from spring 2017.

Responses to the green paper are required by 17 February 2017. Although the government states it has no preferred options at this stage, the paper notes that these issues are part of wider work to enhance public trust in business as a force for good. This includes Matthew Taylor’s review of employment practices in the modern economy, the work to increase gender diversity in the boardroom and in senior management, and work to consider how to improve ethnic diversity. All of this has relevance to the challenge of connecting boards effectively with their workforce and customer base.

Kathryn Clapp is senior professional support lawyer at Employment, Pensions & Mobility group