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How do May's corporate governance reforms shape up?

27 / 09 / 2017
How do May's corporate governance reforms shape...Strengthening the UK's corporate governance framework was a central plank of Theresa May's campaign to become Conservative Party leader last year.

Just over one year (and a turbulent general election) later, the government has confirmed a response to its green paper on corporate governance that was published in 2016.

We analysed the green paper last year, including its proposed three-pronged approach to delivering greater governance. Have Ms May's reforms delivered on the recommendations originally set out?

A summary of the reforms

The government's intentions are outlined in a 68-page document. The Association of Convenience Stores has helpfully summarised the key recommendations as:
  • A requirement that large companies (with over 2,000) employees disclose their corporate governance arrangements and whether or not they follow a formal code;
  • An invitation to the Financial Reporting Council (FRC) to find ways to strengthen the voice of employees and non-shareholders on company boards;
  • A requirement for approximately 900 listed firms to reveal the pay ratio between CEOs and the average worker, with explanatory notes;
  • Asking directors of large public and private companies to acknowledge how they account for the wider interests of employees, consumers and other stakeholders;
  • Encouraging the FRC to collaborate with business to develop a voluntary set of corporate governance principles.
Furthermore, the government has announced a 'comply or explain' measure for representing workers in the boardroom. Organisations can choose one of three options:
  1. A board-appointed non-executive director to represent worker interests;
  2. A formal employee advisory board; or
  3. A director chosen directly from the workforce.
The reforms are expected to come into force from June 2018.

What the government says

The government was quick to promote the UK's reputation as a global leader in corporate governance.

Business secretary Greg Clarke and Ms May launched the reforms on August 29th, claiming the changes send a message that improved transparency and accountability are crucial to running successful, ethical businesses.

"As we leave the EU and chart a new course for our country, the economy we build must be one which truly works for everyone, not just a privileged few," Ms May said in a foreword to the reforms.  

"Our measures to improve corporate governance will help ensure that British businesses can thrive in the future, and that all of us - customers, suppliers, workers and shareholders - share in the benefits."

Several industry organisations also supported the changes.

Director-general of the Institute of Directors Stephen Martin "welcomed the pragmatic approach" of the government, while Stefan Stern, director of the High Pay Centre, said it's a "step in the right direction".

FRC chief Stephen Haddrill and Chris Cummings, CEO of the Investment Association, both said they were looking forward to working with the government in delivering the reforms.

Reforms are "watered down"

Not everyone had good words to say about the changes.

Trades Union Congress general-secretary Frances O'Grady was perhaps the most vocal, describing the reforms as "feeble", "watered down" and a "box-ticking exercise".

"This is a far cry from Theresa May's promise to crack down on corporate excess," she stated.

"Firms will rightly have to publish the pay gap between bosses and ordinary workers, but we are concerned that the government's calculations will take the focus off the lowest-paid."

Mathew Lawrence, senior research fellow on the economy team at the Institute for Public Policy Research, was equally sceptical.

Borrowing Ms O'Grady's words, he said the "feebleness" of the government's reforms highlighted a missed opportunity.

"Shareholder primacy in practice has consequently been a factor in our low rates of investment and productivity, high rates of pay inequality and corporate excess, alongside the low level of public trust in large businesses," he commented.

Mr Lawrence argued that executive pay has risen 400 per cent over the last 20 years, while the real value of the FTSE 100 has barely risen. He added that a bolder reform agenda was still essential if the UK wanted to continue competing on the global stage.

So, do the prime minister's reforms shape up to what they promised? That depends on whom you ask. But corporate governance departments and professionals will no doubt be keeping an eye on any further developments that could affect their livelihood. 

Our 2017 Compensation and Market Trends Report combines our review of the prevailing conditions in the corporate governance recruitment market together with the results of our latest employer survey.

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