If the Business, Energy and Industrial Strategy Committee’s recent report on its inquiry into corporate governance is anything to go by, we may be seeing significant changes ahead. Whilst the report does not believe that a fundamental overhaul of the current framework is necessary it makes a number of noteworthy recommendations, including:
- The UK Corporate Governance Code requiring informative narrative reporting on the fulfilment of directors’ duties under section 172 (duty to promote the success of the company) of the Companies Act 2006. This would require boards to explain precisely how they have considered the different stakeholder interests and how this has been reflected in financial decisions.
- The FRC holding to account company directors in respect of the full range of their duties and reporting publicly to shareholders any failings of the board and initiating legal action for breach of section 172 duties.
- A rating system publicising examples of good and bad corporate governance practice by companies, with a company’s rating being published in its annual report.
- Simplifying the structure of executive pay. Long-term incentive plans should be phased out as soon as possible with deferred stock becoming best practice in incentivising long-term decision making.
- From May 2020, establishing a new target of at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies being women. Companies would be required to explain in their annual report any failure to meet this target and what remedial steps are being taken.
- Employees being appointed to boards not as representatives of the workforce but as directors in their own right, with the necessary skills and aptitudes to play a part as a full board member.
The report concludes: “These reforms are not intended to create onerous new requirements, but to establish arrangements to ensure that [sic] the better enforcement of the Companies Act 2006, to improve the voice of other stakeholders, including employees, and to require companies to engage in a more open and transparent manner with the public. Their aim is to ingrain permanently the values and behaviours of excellent corporate governance into the culture of British business.”