Under the FRC's updated code of standards companies will have to explain how they are incorporating employee voice into board decisions.
The reforms, announced yesterday, include a new provision for workers to be represented either by an employee advisory panel, a director from the workforce, or a non-executive director.
Other changes include a ban on executives selling shares up to five years after they step down, and an extension on the amount of time an independent director can work for a company. The latter is an attempt to increase the number of women on boards.
While the new rules are not compulsory, listed firms may be required to explain to investors why they've chosen not to comply.
Stephen Gee, senior development and business support manager at Business in the Community (BITC), said that a greater emphasis on employee voice would improve engagement and benefit businesses overall.
“Employee voice is critical in workforce engagement and leads to many business benefits," he said. "Companies will have to be more transparent about how they engage with employees, and how employees' opinions have been factored into decision-making. This is an opportunity to build more transparent formalised engagement with employees, which can in turn unlock greater productivity, trust and loyalty.
“Companies should embrace the change as an opportunity to refresh their approach to employee engagement to deliver additional benefits to employees to further improve their experience at work.”
Ben Willmott, head of public policy at the CIPD, added that the code would help to support businesses' success in the long term.
“We welcome that the FRC’s revised Corporate Governance Code places a greater emphasis on the relationship the business has with its employees," he said. "The new Code requires boards to focus much more on providing opportunities for employee voice and ensuring workforce policies and practices are consistent with the company’s values and support its long-term success.
“The workforce is fundamental to any business' success but all too often its voice is not heard at the top levels of organisations. The updated Code is a step in the right direction for ensuring that employee opinions are taken into account on the issues that matter most.”
However, the success of the code will rely on whether employers embrace it, said EY’s UK head of corporate governance Ken Williamson.
“The key issue now is how companies take forward these requirements. The FRC has listened to the feedback from the consultation process and has made the Code more flexible in certain areas,” he said.
“However, the risk is that companies follow the letter rather than the spirit of the new Code, resulting in boilerplate disclosures that don’t provide useful information for investors. Given the global nature of many businesses listed in the UK, it will also be interesting to see how companies with a geographically-diverse workforce apply the new provision relating to workforce engagement.”
Policymakers and campaigners have been calling for tougher rules on corporate governance standards following the collapses of outsourcer Carillion and retailer BHS, among others. Prime minister Theresa May also pledged to crack down on excessive executive pay in 2016.