Theresa May publishes plans for corporate governance

Theresa May has released her Green paper on corporate governance reforms, sparking mixed reactions among companies.

The paper focuses on three main areas: executive pay, strengthening stakeholder voice and corporate governance in the UK's largest privately-held businesses.

In terms of executive pay, two of the measures May wants to introduce include annual binding votes, which would enable shareholders to hold executives to account for performance and the publication of pay ratios, comparing chief executive's pay with the workforce.

The Confederation of British Industry (CBI) with her move on annual binding votes but not on publishing pay ratios.

“Introducing a targeted binding vote regime would focus attention on the most concerning cases and give shareholders the teeth to truly have the final say on top executives’ pay,” said deputy director-general Josh Hardie.

“Blunt pay ratios ignore the fact that different sectors naturally have a wider range of skills - and therefore pay - than others. This has the potential to be genuinely misleading and so must be thought through very carefully.”

May received opposition for these two measures in a report by the Big Innovation Centre (BIC) published last week. The report highlighted how the measures would damage efforts to motivate and retain chief executives. With regards to pay ratios the think-thank felt the ratios would create misleading comparisons and perverse incentives.

May has recently abandoned her pledge to appoint workers to boards at a CBI conference last week but has proposed other measures to get stakeholders involved at boardroom level such as setting up stakeholder advisory panels.

EEF Director of employment and skills policy Tim Thomas said: “Manufacturers use a range of means to ensure that the worker's voice is heard loud and clear in the boardroom. Whether this is achieved by employee representatives, a responsible director or a worker on a board, should be down to company discretion and should not be mandated.”

In terms of corporate governance on private companies, the report stated that the UK governance Code may not suit non Premium Listed companies, which may lead to the Financial Reporting council (FRC) or another business organisation having to set up a new code all together.

“Acting responsibly on pay and employee engagement matters as much to private businesses as PLCs. Different solutions may be needed for different ownership structures so firms will be interested to understand how recommendations can be applied in a way that works,” said Hardie.

British Chambers of Commerce (BCC) Director General Adam Marshall said: “While there is a real appetite from many firms to see action on the very small number of companies and executives whose actions negatively impact the business community as a whole, there is also concern that heavy-handed regulation could reduce investment or create significant costs for firms.”