Corporate governance reforms: Government reply to Parliamentary Committee proposals

More information about the Government’s approach to corporate governance reform has been made clear in a formal response to the findings of last year’s BEIS Parliamentary Committee inquiry into company failures.

Details of the reforms which the Government wishes to take forward were already published on 29 August in the response to its Green Paper on corporate governance consultation. This response statement therefore confirms actions which are already being worked on and also explains why other recommendations coming out of the BEIS Parliamentary Committee inquiry have not been taken up. The summary below highlights the BEIS Committee proposals not covered in the Government’s Green Paper response.

Annual RAG rating of good practice
The Government does not support the suggestion that companies should be rated in a red, amber and green assessment on their corporate governance practice, because it is thought that this would encourage a tick-box compliance culture.

Stewardship
The Government encourages investors to engage with the companies they invest in, including, through the Investor Forum, Investment Association and other representative bodies. Institutional investors are encouraged to continue to disclose their voting records, but will not be obliged to do so.

Company advisers
The BEIS Parliamentary Committee had recommended that more information should be made available on advisers engaged in transactions above a reasonable threshold. While the Government is not planning to introduce further requirements on private companies, it will consider these issues as part of the process of transposing the EU Shareholders Rights Directive into UK law. New measures will aim to make the engagement policies of institutional investors and asset managers more transparent and proxy advisers will also be subject to corporate governance and transparency requirements.

NED guidance and increased accountability
The Government states that it is willing to consider new approaches, if needed, but that it is for the FRC to consider how best to boost the effectiveness of non-executive directors.

Private company accountability
While the Government endorses the development of best practice principles for private companies, it does not feel that a complaint mechanism for pursuing cases of a lack of compliance would be practical. Instead it suggests that the new statutory obligation for large private companies to disclose their best practice arrangements (currently being worked on by BEIS) will allow the FRC, Government, employees and others to monitor these companies.

Diversity of board composition
The Government has declined to build on the targets set out in the Hampton-Alexander Review for the appointment of women to senior and executive management level positions, arguing that more progress will be made through a focus on the current target (33% by 2020). It has also rejected legislation on workforce data by ethnicity and pay band, in favour of setting out the value of a diverse workforce to increase demand for such information. To encourage boards to develop diversity of thought, the FRC is requested to consider how to improve guidance on achieving cognitive diversity. Whether a detailed narrative of board diversity should be maintained as a working document throughout the year is also left for the FRC to consider. Nevertheless, the Government states that it believes that companies could be doing more to ensure they recruit directors from the widest possible pool of potential candidates. It also states that it may be helpful to analyse board reports to see how companies have approached boardroom evaluations and asks the FRC to consider further how this might be done.

Executive pay
The Government will not introduce a new binding vote on pay but has promised to monitor the impact of changes to the UK Corporate Governance Code (to be consulted on this autumn) and will consider further action on pay unless there is clear evidence of companies responding to significant shareholder concerns.