Enforce existing governance rules alongside new plans, say advisers

PRIME MINISTER Theresa May is to go ahead with plans to reform rules on executive pay, worker representation on boards and governance of large private businesses with proposals laid out in a green paper.

The accountancy profession broadly welcomed the proposals, saying it was timely to review the governance rules in light of growing public interest in executives’ behaviour – and a sense of growing inequality.

In the green paper, May said: “It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change.”

Jo Iwasaki, head of corporate governance at ACCA, said the government has to meet the public’s expectations on setting boardrooom accountability without “putting the brakes” on UK competitiveness.

“The publication of this green paper provides an important opportunity to evaluate the current corporate governance framework and see what remains fit for purpose.”

Employee ‘voice’

Some critics argue that the prime minister has watered down initial proposals to put workers on boards. The green paper suggests instead that workers will have a ‘voice’ on the board with one board member having responsibility for employee matters.

The proposed requirement to ensure private business comply with the UK governance code was also welcomed. Only publicly listed companies are required by law to comply with the code, or explain why they have not.

Iwasaki said: “The proposed adoption of the UK governance framework by private companies is an interesting initiative which should help encourage best practice.  Ultimately however, the focus should be on a framework that serves the need of investors.

Josh Hardie, CBI deputy director-general, said: “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.”

Accountancy watchdog the Financial Reporting Council (FRC) said it had already submitted its response to the business department’s consultation and would consult on updating the code next year.

Enforce what’s already in place

The FRC has suggested that, rather than change company law, it was a question of enforcement. The regulator has suggested company directors better report on their responsibilities under section 172 of the Companies Act 2006.

The regulator also suggests developing the role of the remuneration committee, and what happens when there are significant votes against the remuneration report, plus ensuring boards take account of a more diverse range of views in their decision-making.

ACCA said it would carry out global research on good corporate governance to input into the debate.