Corporate governance reform: government response to the green

CORPORATE GOVERNANCE

REFORM

The Government response to the

green paper consultation

August 2017

CORPORATE GOVERNANCE

REFORM

The Government response to the

green paper consultation

The response can be found on the BEIS section of GOV.UK:

https://www.gov.uk/beis

Corporate Governance Reform

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Introduction from the Prime Minister

As the United Kingdom prepares to forge a new role on the world

stage as a global trading nation, the strength of our businesses

are critical to our future success.

Our best companies are hard-working and responsible. They

invest in their workforce’s skills, and are a source of creativity and

innovation, knowing that this is the way to succeed in the long

term. A strong and effective system of corporate governance,

which incentivises business to take the right long-term decisions,

is key to that success.

Our system of corporate governance is rightly envied and

emulated around the world, but we must continue to improve if we are to retain our competitive

edge. We have also seen worrying evidence that a small minority of our companies are falling

short of the high standards we expect. I want to tackle these problems and strengthen people’s

faith in a well-regulated free market economy.

That’s why last Autumn, the Government began a discussion about where reform was needed.

In some companies executive pay has become disconnected from the performance of the

company itself. In others, some directors seem to have lost sight of their broader legal and

ethical responsibilities. There is a worrying lack of transparency around how some large

privately-held companies behave. A responsible government must recognise these problems,

and show leadership to tackle them.

So we are now setting out a range of legislative and business-led measures which will improve

corporate governance and give workers and investors a stronger voice. This will be good for

business. Firms which listen to their workers and are responsive to their shareholders see the

benefits on their bottom line. So by giving a stronger voice to those outside the boardroom, we

incentivise businesses to take the right long-term decisions and help restore the public’s trust.

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. 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.

PRIME MINISTER RT HON THERESA MAY MP

Government response: Corporate Governance Reform

iii

Foreword by the Secretary of State for

Business, Energy and Industrial Strategy

One of Britain’s biggest assets in competing in the global economy

is our reputation for being a dependable and confident place in

which to do business. Our legal system, our framework of company

law and our standards of corporate governance have long been

admired around the world.

One of the reasons why we have maintained this reputation is that

we have kept our corporate governance framework up to date with

reviews and improvements being made from time to time.

The Government’s green paper of last November followed in that

tradition, looking at specific aspects of corporate governance –

executive pay, corporate governance in large privately-held

businesses and the steps that company boards take to engage and listen to employees and

other groups with an interest in corporate performance - where the Government saw particular

scope to build on the current framework.

The green paper generated a wide debate and a big response from a cross-section of

business and society. I am grateful to all those who responded. They have provided the

Government with a solid basis on which to act. We have also benefitted from the work of the

House of Commons BEIS Committee which published recommendations for corporate

governance reform in April.

This document responding to our green paper consultation sets out a package of measures

designed to:

 Address concerns that a minority of companies are not responding adequately when they

encounter significant shareholder opposition to levels of executive pay. Remuneration

committees will also have to do more to engage with the workforce to explain how top pay

relates to wider company pay policy. And pay ratio reporting comparing the remuneration of

the CEO with average UK employee pay will be introduced for quoted companies to help

set executive pay in the wider company context;

 Drive change in how our largest companies engage at board level with employees,

customers, suppliers and wider stakeholders to improve boardroom decision-making,

deliver more sustainable business performance and build wider confidence in the way

businesses are run; and

 Encourage large private companies to adopt stronger corporate governance arrangements,

reflecting their economic and social significance, through the development of a set of

corporate governance principles; and introduce new measures to require companies, both

Government response: Corporate Governance Reform

public and private, of a significant size to disclose the corporate governance arrangements

they have in place.

These measures are in line with the UK’s approach of strengthening corporate governance

through non-legislative means: through changes to the UK Corporate Governance Code

overseen by the Financial Reporting Council and voluntary industry-led action where possible,

and legislating where necessary.

Industry has a key role to play in encouraging and driving further improvements. I therefore

particularly welcome the contributions that the Investment Association, the Institute of

Chartered Secretaries and Administrators (ICSA), and the Association of General Counsel and

Company Secretaries working in FTSE100 Companies (GC100) will make. The Investment

Association, for example, will be establishing a public register to ensure that there is greater

visibility for quoted companies who encounter significant shareholder opposition to levels of

executive pay. ICSA, with the Investment Association, is producing practical guidance on ways

that company boards can engage with employees and other stakeholders.

At a time when investment and competitiveness are key, it is right that we build on our

corporate governance strengths to equip us for the economic opportunities and challenges that

lie ahead.

RT HON GREG CLARK MP

Contents

Introduction from the Prime Minister ___________________________________________ ii

Foreword by the Secretary of State for Business, Energy and Industrial Strategy _________ iii

General information ________________________________________________________ 1

Executive summary ________________________________________________________ 2

1. Executive pay ___________________________________________________________ 8

2. Strengthening the employee, customer and wider stakeholder voice ________________ 24

3. Corporate governance in large privately-held businesses _________________________ 36

4. Other issues ____________________________________________________________ 43

5. Boardroom diversity ______________________________________________________ 48

Annex A – List of respondents ________________________________________________ 53

Annex B – Numerical analysis of responses to green paper questions by respondent type _ 59

Government response: Corporate Governance Reform

General information

Purpose of this response

The UK has long been regarded as a world leader in corporate governance, combining

high standards with low burdens and flexibility. It is an important part of what makes the

UK such an attractive place for both businesses and investors. We want to build on these

strengths and reinforce the vital relationship of trust between businesses and the

communities they serve.

This objective was the motivation behind the Government’s green paper, published on 29

November 2016, which stimulated a broad-ranging debate on ways to strengthen the UK’s

corporate governance framework. During the consultation period, which closed on 17

February 2017, Ministers and officials participated in a large number of conferences, panel

events, roundtables and meetings, including in the devolved administrations. These sought

views from business representative and professional bodies, trade unions, company

secretaries, executive and non-executive directors of UK companies, the investment

community, academics, think-tanks, consumer bodies and wider civil society groups. In

addition, Which? ran an online discussion which made a number of suggestions on how

consumer views could be represented on boards and other issues related to trust in

companies.

The Government received 375 formal responses to the green paper, including 48 via the

Citizens Space portal. It has also had the benefit of the House of Commons Business,

Energy and Industrial Strategy (BEIS) Committee’s report on Corporate Governance

published on 5 April. The Government has therefore built a strong evidence base to inform

its decisions.

This document sets out the Government’s response to the green paper consultation and

identifies nine proposals for reform which it now intends to take forward. The document

also includes a summary of responses to the green paper and a list of the names of

organisations that responded, but excluding personal names, addresses or other contact

details.

Territorial extent

The UK Government is responsible for the operation and regulation of business entities in

England and Wales, and in Scotland. Previously the Northern Ireland administration has

agreed that, while the operation and regulation of business entities remains a transferred

matter within the legislative competence of the Northern Ireland Assembly, amendments to

the Companies Act 2006 and legislation regulating business entities should be made in the

same terms for the whole of the United Kingdom.

Government response: Corporate Governance Reform

Executive summary

The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent

management that can deliver the long-term success of a company. It involves a framework

of legislation, codes and voluntary practices. A key element is protecting the interests of

shareholders where they are distant from the directors running a company. It also involves

having regard to the interests of employees, customers, suppliers and others with a direct

interest in the performance of a company. Good corporate governance provides

confidence that a company is being well run and supports better access to external finance

and investment.

The UK is recognised as having a world-leading corporate governance framework. It gives

us an international competitive advantage and is an important factor in making the UK an

attractive place in which to invest. At a time when investment and competitiveness are key,

and when the Government is developing an industrial strategy, it is right that we look to

build on our corporate governance strengths to equip us for the economic challenges and

opportunities that lie ahead.

The aim of the green paper consultation was to consider what changes might be

appropriate in the corporate governance regime to help ensure that we improve business

performance and have an economy that works for everyone. This Government response

now sets out nine headline proposals for reform across the three specific aspects of

corporate governance on which we consulted:

 Executive pay;

 Strengthening the employee, customer and supplier voice; and

 Corporate governance in large privately-held businesses.

It also takes into account the need for effective enforcement of the corporate governance

framework.

Executive pay

Section 1 of this consultation response sets out the Government’s plans for reform in

relation to executive pay, which has risen faster than corporate performance. The green

paper consultation provided convincing evidence to support the case for further, targeted

reform. While many companies have responded positively to the reforms introduced in

2013, a persistent small minority of businesses continue to disregard the views of

shareholders on pay each year. There are also few signs that many remuneration

committees take seriously enough their existing obligations to take account of wider

workforce pay and conditions in setting executive remuneration. The Government also

recognises concerns expressed by many respondents about the unnecessary complexity

Government response: Corporate Governance Reform

and uncertainty of executive pay, particularly around the potential outcomes of long-term

incentive plans.

The Government therefore intends to:

(i) Invite the Financial Reporting Council (FRC) to revise the UK Corporate

Governance Code (the “Code”) to:

 Be more specific about the steps that premium listed companies should take

when they encounter significant shareholder opposition to executive pay policies

and awards (and other matters);

 Give remuneration committees a broader responsibility for overseeing pay and

incentives across their company and require them to engage with the wider

workforce to explain how executive remuneration aligns with wider company pay

policy (using pay ratios to help explain the approach where appropriate); and

 Extend the recommended minimum vesting and post-vesting holding period for

executive share awards from 3 to 5 years to encourage companies to focus on

longer-term outcomes in setting pay.

(ii) Introduce secondary legislation to require quoted companies to:

 Report annually the ratio of CEO pay to the average pay of their UK workforce,

along with a narrative explaining changes to that ratio from year to year and

setting the ratio in the context of pay and conditions across the wider workforce;

and

 Provide a clearer explanation in remuneration policies of a range of potential

outcomes from complex, share-based incentive schemes.

(iii) Invite the Investment Association to implement a proposal it made in its response to

the green paper to maintain a public register of listed companies encountering

shareholder opposition to pay awards of 20% or more, along with a record of what

these companies say they are doing to address shareholder concerns.

The Government will consider further action at a future point unless there is evidence that

companies are taking active and effective steps to respond to significant shareholder

concerns about executive pay outcomes.

In addition to these proposals, the Government will take forward its manifesto commitment

to commission an examination of the use of share buybacks to ensure that they cannot be

used artificially to hit performance targets and inflate executive pay. The review will also

consider concerns that share buybacks may be crowding out the allocation of surplus

capital to productive investment. The Government will announce more details shortly.

Government response: Corporate Governance Reform

Strengthening the employee, customer and wider stakeholder voice

Section 2 sets out three key proposals for reform to strengthen the voice of employees,

customers and wider stakeholders in boardroom decision-making. The green paper

consultation revealed strong support for action to strengthen the stakeholder voice. This

was seen as an important factor in improving boardroom decision-making and delivering

better, more sustainable business performance.

Many respondents also thought that big business should do more to reassure the public

that companies are being run, not just with an eye to the interests of the board and the

shareholders, but with a recognition that they have responsibilities to employees,

suppliers, customers and wider society. Matthew Taylor’s Report on Employment

Practices in the Modern Economy

also noted that the tone for fair and decent work is set

at the top of an organisation and that company owners have a wider responsibility towards

the people who work for them – both directly and through their supply chain – and should

take this responsibility seriously.

Section 172 of the Companies Act 2006 already requires the directors of a company to

have regard to these wider interests in pursuing the success of the company, but a large

number of respondents thought that this aspect of the legal framework could be made to

work more effectively through improved reporting, Code changes, raising awareness and

more guidance.

The Government therefore intends to:

(iv) Introduce secondary legislation to require all companies of significant size (private

as well as public) to explain how their directors comply with the requirements of

section 172 to have regard to employee and other interests;

(v) Invite the FRC to consult on the development of a new Code principle establishing

the importance of strengthening the voice of employees and other non-shareholder

interests at board level as an important component of running a sustainable

business. As a part of developing this new principle, the Government will invite the

FRC to consider and consult on a specific Code provision requiring premium listed

companies to adopt, on a “comply or explain” basis, one of three employee

engagement mechanisms: a designated non-executive director; a formal employee

advisory council; or a director from the workforce; and

(vi) Encourage industry-led solutions by asking ICSA (the Institute of Chartered

Secretaries and Administrators: The Governance Institute) and the Investment

Association to complete their joint guidance on practical ways in which companies

https://www.gov.uk/government/groups/employment-practices-in-the-modern-economy

Government response: Corporate Governance Reform

can engage with their employees and other stakeholders. The Government will also

invite the GC100 group of the largest listed companies (FTSE100 General

Counsels) to complete and publish new advice and guidance on the practical

interpretation of the directors’ duties in section 172 of the Companies Act 2006.

These proposals are in line with recommendations made by the House of Commons BEIS

Committee and will drive change in how big businesses engage with their key

stakeholders,. Putting in place higher expectations for all our largest companies, and in

particular for our leading, premium listed companies, should also encourage the

development and uptake of good practice in the wider business community.

Corporate governance in large privately-held businesses

Section 3 sets out two proposals for reform regarding the corporate governance of large

privately-held businesses, in addition to the new requirements in relation to section 172 set

out above. The consultation revealed broad support for action to encourage high

standards of corporate governance in the UK’s largest private companies reflectingthe

significant impact that these companies have on employees, suppliers, customers and

others, irrespective of their legal status.

The Government therefore intends to:

(vii) Invite the FRC to work with the IoD, the CBI, the Institute for Family Businesses, the

British Venture Capital Association and others to develop a voluntary set of

corporate governance principles for large private companies under the

chairmanship of a business figure with relevant experience; and

(viii) Introduce secondary legislation to require companies of a significant size to disclose

their corporate governance arrangements in their Directors’ Report and on their

website, including whether they follow any formal code. This requirement will apply

to all companies of a significant size unless they are subject to an existing corporate

governance reporting requirement. The Government will also consider extending a

similar requirement to Limited Liability Partnerships (LLPs) of equivalent scale.

Other issues

Section 4 of the green paper provided respondents with an opportunity to raise other

aspects of corporate governance not covered in the earlier sections. Consultation revealed

questions over whether the FRC has the powers, resources and status to undertake its

functions effectively.

(ix) To address this the Government will ask the FRC, the Financial Conduct Authority

and the Insolvency Service to conclude new or, in some cases, revised letters of

understanding with each other before the end of this year to ensure the most

effective use of their existing powers to sanction directors and ensure the integrity

Government response: Corporate Governance Reform

of corporate governance reporting. The Government will also consider, in light of

this work, whether further action is required.

This package of policy measures, as a whole, is in line with the UK’s approach of

strengthening corporate governance through non-legislative, code-based provisions and

voluntary industry action to keep pace with higher expectations of business, and only

legislating where necessary. Big business and institutional investors now have a clear

opportunity to show that they can respond to the weaknesses explored in the green paper

in relation to executive pay, stakeholder voice at board level and standards in large private

companies without primary legislation.

Next steps

Implementing these reform proposals will require a combination of changes to the UK

Corporate Governance Code (which is the responsibility of the FRC), voluntary industry

action, secondary legislation and action by relevant regulators to improve co-ordination

and the use of existing powers.

The FRC intends to consult on amendments to the UK Corporate Governance Code in the

late Autumn. The Government intends to lay before Parliament draft secondary legislation,

where required, before March 2018. Where necessary, there will be consultation on the

detail of the secondary legislation. The work on developing voluntary corporate

governance principles for large private companies will commence in the Autumn.

The current intention is to bring the reforms into effect by June 2018 to apply to company

reporting years commencing on or after that date.

House of Commons Business, Energy and Industrial Strategy Committee’s report

on Corporate Governance

The BEIS Committee’s report on Corporate Governance published in April

made valuable

recommendations addressed to the FRC, the Government and others to help embed the

behaviours of good corporate governance in the culture and values of UK business. Much

of the Committee’s thinking and several of its key recommendations align with the

Government’s own proposals. In particular, the Government agrees with the Committee’s

recommendations for:

 More narrative reporting on how companies are engaging with stakeholders and

how directors are meeting the duty in section 172 (Companies Act 2006) to have

regard to employee and other interests;

https://publications.parliament.uk/pa/cm201617/cmselect/cmbeis/702/702.pdf

Government response: Corporate Governance Reform

 Business-led development of a code designed for large privately-held businesses.

The Government also believes that these businesses should report on their

corporate governance arrangements, including whether or not they adhere to the

new code, but that they should have the flexibility to take an alternative approach if

they consider it to be more effective to the good governance of their business; and

 The introduction of a pay ratio reporting requirement for quoted companies

comparing the pay of the chief executive officer with that of pay in the wider UK

workforce.

Most of the recommendations in the Committee’s report are concerned with potential

amendments and enhancements to the UK Corporate Governance Code and guidance.

The Government is supportive of many of these recommendations, but they are ultimately

matters for the FRC to consider. Many of them will be addressed in the consultation on

amendments to the Code that the FRC intends to undertake in the Autumn.

The Committee’s report also included recommendations for improving the ethnic, gender

and social diversity of boards. These issues were not ones on which the green paper

sought views because action to address them was being taken forward separately. Section

5 of this response document, however, sets out the steps that the Government and others

are taking to improve boardroom diversity and responds to the Committee’s

recommendations in this area.

Other work to encourage corporate responsibility

This reform package will complement wider work that the Government and others are

undertaking to enhance public trust in business as a force for good and encourage

corporate responsibility. This includes follow-up to the review of “mission-led” businesses

(including work to encourage business with purpose and a prospective new business-civil

society collaboration), Matthew Taylor’s review of employment practices

, and the work

that Sir Philip Hampton

, Sir John Parker and Baroness McGregor-Smith are leading to

increase gender and ethnic diversity in the boardroom and the workforce. The Government

would like to pay special tribute to the late Dame Helen Alexander for the key role she

played in this important work.

https://www.gov.uk/government/publications/advisory-panel-to-mission-led-business-review-final-report

https://www.gov.uk/government/groups/employment-practices-in-the-modern-economy

https://www.gov.uk/government/publications/ftse-women-leaders-hampton-alexander-review

Government response: Corporate Governance Reform

1. Executive pay

This section summarises consultation responses to the executive

pay chapter of the green paper and sets out the Government’s

plans for strengthening the existing executive pay framework in light

of the consultation.

1.1 The Government’s green paper highlighted persisting concerns in the investment

community and wider society over very high levels of executive remuneration at UK

quoted companies. Previous reforms introduced by the Government have gone

some way to strengthening and increasing transparency in the UK executive pay

framework - in particular the requirement to gain shareholder approval for executive

pay policies every three years and the need to disclose the pay of each director in a

single figure. However, executive pay has continued to be a key factor in public

dissatisfaction with large businesses, and a source of frustration to UK investors.

FTSE100 CEO total pay has increased from an average of around £1m in 1998 to

over £4m today, fuelling a widespread perception that boardroom remuneration is

increasingly disconnected from the pay of ordinary working people. It is also

questionable whether long-term company performance has consistently matched

this rapid growth in pay.

1.2 The green paper invited views on a range of options to strengthen shareholders’

ability to hold companies to account on executive pay, and to improve transparency

and drive greater alignment between pay at the top and across the rest of the

company. Two thirds of respondents commented on the executive pay chapter - a

summary of their views is set out below.

Summary of responses

Question 1: Do shareholders need stronger powers to improve their ability to hold

companies to account on executive pay and performance? If so, which of the

options mentioned in the green paper would you support? Are there other options

that should be considered?

1.3 Under this question, the green paper invited views on five possible options to

strengthen shareholder powers on executive pay:

(i) Make all or some elements of the executive pay package (as set out in the

annual directors’ remuneration report) subject to an annual binding vote;

Government response: Corporate Governance Reform

(ii) Introduce stronger consequences for a company losing its annual advisory

vote on the directors’ remuneration report;

(iii) Require or encourage quoted company pay policies to set an upper threshold

for total annual remuneration, and ensure a binding vote where annual

remuneration exceeds that threshold;

(iv) Require or give shareholders the power to hold the existing binding vote on

the executive pay policy more frequently than every three years; and

(v) Strengthen the UK Corporate Governance Code to provide greater specificity

on how companies should engage with shareholders on pay, including where

there is significant opposition to a remuneration report.

1.4 A majority of respondents who addressed this question were in favour of

strengthening shareholders’ powers to hold companies to account on executive

pay

. Those in favour included most of the UK institutional investment community

and most wider business representative bodies. Change was also backed by

respondents from wider civil society, including the great majority of private individual

respondents who commented on this question. The main reason cited by

respondents favouring further reform was the perceived unwillingness by

companies (with some positive exceptions) to respond meaningfully to significant

shareholder dissent on executive pay. Other respondents said it would be helpful to

give companies clearer guidance on the steps they should take to address dissent,

in the interests of consistency and transparency.

1.5 A substantial minority of the respondents who addressed this question argued that

the reforms introduced in 2013 already give shareholders sufficient power and

oversight over executive pay. This included most quoted companies who responded

to the consultation, some think-tanks and some business representative bodies.

Several of these respondents highlighted the high levels of shareholder approval for

most quoted companies’ pay policies and pay reports since the 2013 reforms were

introduced, and the fact that average executive pay increases have been broadly in

line with inflation over the same period.

1.6 Out of those respondents offering their views on the option of introducing an annual

binding vote on executive remuneration at all quoted companies (option (i)), around

one third supported this option. However, most supporters of new powers felt that

this would be disproportionate, given that only a relatively small number of

companies have experienced significant shareholder dissent on pay in recent years.

Further details of numbers of respondents to questions can be found in the table at Annex B.

Government response: Corporate Governance Reform

1.7 Support for options (iii) and (iv) – setting a maximum executive pay threshold, and

introducing more frequent votes on the remuneration policy – was limited to less

than a quarter of those respondents who commented on these options. Concern

was expressed that setting a maximum threshold would lead companies to set pay

levels at, or close to, whatever that threshold was, leading to a ratcheting of pay;

while having more frequent votes on the pay policy was generally held to be

counter-productive to the longer-term stability and certainty delivered by having pay

policies cover a three-year period, as currently.

1.8 There was greatest support for option (ii), complemented by option (v), i.e. stronger

consequences for companies losing or encountering significant dissent in the

annual shareholder advisory vote on the directors’ remuneration report, backed by

new guidance in the UK Corporate Governance Code. Around two thirds of relevant

respondents supported these options, including a large majority of investors and

most business bodies. Investors highlighted a number of cases where they said

companies had not meaningfully addressed shareholder dissent on a remuneration

report. They also argued for stronger incentives on companies to get the

remuneration report right the first time through enhanced shareholder engagement.

1.9 Various thresholds were suggested for what should be regarded as ‘significant

dissent’, ranging from 10% to 35%. On the nature of any new action that may be

required of companies facing significant dissent, there was a roughly even split

between those favouring a new binding vote on a revised pay policy, perhaps

subject to ‘supermajority’ (75%) approval, and those who preferred a one-off

binding vote on the following year’s remuneration report. Most respondents backing

options (ii) and (v) wanted the escalation mechanism to be triggered after

shareholder dissent in any one year, although a few respondents proposed that it

should only be triggered if companies had faced dissent two years in a row.

Question 2: Does more need to be done to encourage institutional and retail

investors to make full use of their existing and any new voting powers on pay? Do

you support any of the options mentioned? Are there other ideas that should be

considered?

1.10 Under this question, the green paper invited views on three specific options:

 Mandatory disclosure of fund managers’ voting records at AGMs and the

extent to which they have made use of proxy voting;

 Establish a senior “shareholder” committee to engage with executive

remuneration arrangements; and

 Consider ways to facilitate or encourage individual retail shareholders to

exercise their rights to vote on pay and other corporate decisions.

Government response: Corporate Governance Reform

1.11 Less than half of respondents commented on this section of the green paper, and

only a third commented on the specific options above. Of those who did comment

on the overarching question, almost three quarters believed more could be done to

encourage or enable institutional or retail investors to make greater use of their

voting powers.

1.12 On disclosure of fund managers’ voting records, around two thirds of those who

commented on this option were supportive of disclosure being mandatory. A

common argument in favour was that it would drive better stewardship of

companies by institutional investors, providing greater accountability by asset

managers to asset owners on the approach they are taking on executive

remuneration and other issues. Most support for this option came from wider

society groups, private individuals and some representatives of asset owners.

1.13 Investor groups, some companies and some think-tanks were against mandatory

disclosure of voting records, arguing that disclosure has improved significantly over

the past three years and is already required on a ‘comply or explain’ basis under the

FRC’s Stewardship Code. This code also encourages disclosure of how advice

from proxy advisers has informed voting. Investor groups also expressed concern

that mandatory disclosure could lead to a tick-box approach and greater reliance on

proxy vote advisory services.

1.14 On the ‘shareholder committee’ option, three in ten of those who commented on it

saw merit in the idea. It was supported predominantly by retail shareholder groups,

by some private individuals and by some wider society groups. Their rationale was

that it would drive more informed and pro-active stewardship of companies by major

investors, augmented by a retail investor perspective, and that the Swedish model it

is based on could be adapted to fit the UK’s more fragmented and international

shareholder base.

1.15 The option was opposed by institutional investors, companies, most business

representative bodies, some think-tanks and some private individuals. A common

argument against was that it would be difficult to find a group of investors that could

represent the views of the hundreds of investors typically holding shares in any

large quoted company. Some smaller institutional investors expressed concern that

such committees would entrench large investors, making it harder for smaller

investors to have a say on the running of companies. Both companies and investors

expressed concern that a shareholder committee with strategic oversight of a

company board and advance say on draft pay and nomination proposals would blur

the lines between stewardship and executive decision-making, and undermine the

UK’s unitary board model.

Government response: Corporate Governance Reform

1.16 Of the minority of respondents who considered the question of retail investor rights,

three quarters thought more could be done to encourage or facilitate greater

engagement and influence by retail investors. A recurring argument in favour was

that the increased holding of shares through pooled, electronic accounts has made

it more difficult for individual investors or other underlying asset owners to enjoy

voting rights, which can often sit elsewhere in the investment chain. There was no

consensus on how these investors should be given greater voting rights with some

favouring greater efforts by brokers to offer ‘pass back’ of voting rights to their

clients, and others calling for legislative change to mandate such ‘pass back’.

1.17 Those opposed to legislative change in this area argued that it would increase the

operational costs of holding shares which would be passed on to the underlying,

retail investors, impacting negatively on the returns for their investments. They also

cautioned that any reform measures should only focus on the small minority of

individual investors who they said typically wish to vote at company AGMs.

1.18 Many respondents who commented for or against these options said this was a

complex issue that would require separate consultation were any reform measures

to be taken forward.

Question 3: Do steps need to be taken to improve the effectiveness of

remuneration committees, and their advisers, in particular to encourage them to

engage more effectively with shareholder and employee views before developing

pay policies? Do you support any of the options set out in the green paper? Are

there any other options you want to suggest?

1.19 While acknowledging the challenging role that remuneration committees face in

balancing a range of interests and considerations, the green paper highlighted

concerns in the investor community and elsewhere that remuneration committees

could do more to engage with both shareholders and the wider company workforce

in the development and implementation of executive remuneration policies.

1.20 The green paper invited views on two possible options to address this concern:

 Require the remuneration committee to consult shareholders and the wider

company workforce in advance of preparing the company’s pay policy; and

 Require the chairs of remuneration committees to have served for at least 12

months on a remuneration committee before taking up the role.

1.21 Just over half the responses to the green paper included comments on this

question. Of those who provided comments, around four fifths of respondents

believed there was a need to improve the effectiveness of remuneration committees

in some way. These included almost all institutional investor respondents, most

business representative bodies, all think-tank respondents and a large majority of

Government response: Corporate Governance Reform

responses from members of the public. Those respondents not in favour of either

option included around two thirds of respondents from quoted companies.

1.22 Respondents advocating change cited various benefits to linking the role of the

remuneration committee to wider workforce pay and incentives, including increased

staff motivation, perceptions of fairness and a better sense of collective company

purpose. A large majority of investor respondents suggested that an expanded role

for remuneration committees should cover both workforce and shareholder

engagement, on the basis that it is in the long-term interests of a company, and

therefore of its investors, that executive remuneration is demonstrably aligned with,

and sensitive to, wider workforce pay and incentives.

1.23 Various suggestions were offered concerning how remuneration committees should

undertake such an expanded role, including: the appointment of an employee

representative to the committee; a requirement on the committee to meet with an

employee advisory panel at least once a year; the extension of the committee’s

functions to include strategic oversight of human relations and wider workforce pay

policy; and the carrying out of an employee survey annually, explicitly designed to

inform the committee’s decisions on executive pay the following year.

1.24 One think-tank advocated the creation of a ‘Fair Pay Report’ within the existing

remuneration report, in which the committee would set out the company’s approach

to pay fairness, and provide explanations for the differences between executive pay

and that of the wider workforce. Under this proposal, the Fair Pay Report would be

developed in part through communication by the committee with the company’s

employees.

1.25 A number of institutional investors said that remuneration committees should focus

on increasing the quality of their engagement with shareholders in advance of the

annual AGM. This was seen to be particularly important when companies were

proposing new triennial executive pay policies, or where the remuneration

committee was seeking to amend performance targets or to justify pay awards that

might at first glance seem inconsistent with wider challenges facing the company

over the previous year. In such cases, investors stressed the need for remuneration

committees, backed if necessary by the company Chairman, to make bespoke and

pro-active efforts to explain their approach to shareholders. Some business bodies

and business advisers said that the UK Corporate Governance Code should

provide greater guidance on how remuneration committees should engage with

shareholders on the development of executive pay policies.

1.26 Arguments against expanding the remuneration committee’s role centred in part on

resource and time constraints, with some respondents highlighting the expanded

set of activities committees have already taken on since the 2013 executive

Government response: Corporate Governance Reform

remuneration reforms were introduced. Several quoted companies said that it was

not practical to engage bilaterally on executive pay proposals with all shareholders,

which could comprise many hundreds of investors, and that a targeted approach

focused on the largest institutional investors and on those providing advisory

services to investors was therefore appropriate. Those and some other respondents

argued that remuneration committees function most effectively through informal and

sensitive conversations with key shareholders and, where relevant, within the

company, and that introducing a new formal set of requirements could just lead to a

tick-box compliance approach. Data confidentiality was cited by some as a specific

reason for not allowing employees to attend remuneration committee meetings

either as participants or observers.

1.27 Most respondents thought that the chair of the remuneration committee should have

at least 12 months’ prior experience of sitting on a remuneration committee before

taking up the role of chair. However, a majority of business and investor

respondents felt this should be introduced on a ‘comply or explain’ basis through

the UK Corporate Governance Code rather than through legislation. They thought

that some flexibility was required to take account of the limited circumstances where

it might be appropriate to appoint someone with less experience. Examples

provided included circumstances where a fresh approach was needed to

remuneration policy, or where a company was finding it difficult to find a non-

executive director who was a good fit with their business and already had 12

months’ experience of a remuneration committee.

Question 4: Should a new pay ratio reporting requirement be introduced? If so,

what form of reporting would be most useful? How can misleading interpretations

and inappropriate comparisons (for example, between companies in different

sectors) be avoided? Would other measures be more effective?

1.28 The green paper invited views on the possible benefits and risks of requiring

companies to report the annual ratio of CEO pay to that of the wider workforce.

1.29 Just over half of respondents addressed this question, with a small majority in

favour of introducing some form of pay ratio reporting. The greatest support for pay

ratios came from institutional investors (asset managers and asset owners), wider

society groups, think-tanks and academics, and members of the public. Three

quarters of quoted companies were opposed to pay ratios. Business representative

bodies, professional bodies and advisers were fairly evenly divided on this question.

1.30 The main reason cited in favour of introducing a pay ratio was that it would provide

a new tool and incentive for companies, and in particular their remuneration

committees, to explain their overall approach to pay to investors and employees. In

the view of many supporters, a pay ratio of whatever size should be justifiable and

Government response: Corporate Governance Reform

explainable within each company’s particular strategy and business model. Several

respondents also commented that the introduction of a pay ratio reporting

requirement could encourage companies to spread reward and incentives more

broadly within the company. One think-tank stated that, despite new reporting

requirements on executive pay introduced in 2013, there is currently no indicator

that provides investors, employees and other stakeholders with a measure of the

dispersion of pay within a company, and that a pay ratio reporting requirement

would help address that gap.

1.31 Those opposed to pay ratios expressed concern that they would add little value and

lead to misleading comparisons between companies in different sectors and with

different skill and wage profiles. A supermarket group, for example, would have a

significantly wider pay ratio than an investment bank, because of a prevalence of

low paid workers in the former, yet the CEO roles might be equally demanding.

Opponents also suggested it could provide an incentive to companies to off-shore

or out-source employment in order to achieve a better balanced pay ratio.

1.32 Those in favour of pay ratio reporting provided a range of views on how it should be

implemented, including which metrics should be used and the overall scope. There

were marginally more responses in favour of comparing CEO pay to the median

rather than to the mean average of the workforce, and also a number of calls from

business bodies and others to limit any new reporting requirement to a company’s

UK employees, for reasons of simplicity and consistency.

1.33 A number of investor responses called for pay ratio reporting to be extended to

compare the pay of the CEO and other board members with the remuneration of

senior managers in the tier immediately below the board. Those making this

suggestion said that it would help investors identify governance issues since a big

gap could be an indicator of an over-powerful CEO or of inadequate attention being

paid to succession planning. Several wider civil society respondents suggested that

ratio reporting should also compare CEO pay to that of the lowest paid worker or

the lowest paid decile in the workforce.

1.34 Several responses – both for and against - raised concerns that without additional

narrative and explanation, pay ratios could be misleading. There were some calls

for the narrative to include a comparison to other companies in the same sector.

1.35 Some responses raised questions about how the ratio should be calculated.

Recommendations included that it should not be a single figure, but split into three

distinct categories: fixed pay; expected value of variable pay; and actual value of

variable pay received. Guidance on how pay ratios should be calculated was

requested by a number of respondents.

Government response: Corporate Governance Reform

Question 5: Should the existing, qualified requirements to disclose the

performance targets that trigger annual bonus payments be strengthened? How

could this be done without compromising commercial confidentiality? Do you

support any of the options outlined in the green paper? Do you have any other

suggestions?

1.36 The 2013 executive pay reforms require the disclosure of the bonus targets and

performance measures which trigger annual bonus targets and other benefits.

However, there is an exemption for information which in the directors’ opinion is

commercially sensitive. The green paper invited views on whether steps needed to

be taken to encourage more disclosure of targets, for example by:

 Encouraging the Investment Association, investors and investor advisers to

maintain pressure on companies to provide full retrospective disclosure of

performance targets and to consider strengthening the FRC’s remuneration

guidance; or

 Making retrospective disclosure of all bonus targets within a specified

timeframe a legal reporting requirement.

1.37 A little over two fifths of total respondents addressed this issue with a slight majority

in favour of full, retrospective disclosure of bonus performance targets. Roughly

three quarters of institutional investors favoured full disclosure, while three quarters

of quoted company respondents were opposed.

1.38 Although institutional investors were generally in favour of full disclosure, most were

not convinced of the need for legislative change to require it. They noted that

investor-led pressure had been successful in increasing disclosure significantly in

recent years, to the extent that all FTSE100 companies now disclose retrospectively

any bonus targets not initially disclosed.

1.39 However, some investors thought that existing reporting requirements in legislation

could be amended to clarify, and potentially narrow, the scope for companies to

withhold disclosure of some bonus targets on grounds of commercial sensitivity.

Some investors also thought there should be better alignment between the Key

Performance Indicators (KPIs) and other metrics used in executives’ bonus targets,

and between the KPIs and metrics underpinning the company’s overarching

strategy.

Government response: Corporate Governance Reform

Question 6: How could long-term incentive plans be better aligned with the long-

term interests of quoted companies and shareholders? Should holding periods be

increased from a minimum of three to a minimum of five years for share options

awarded to executives?

1.40 The green paper highlighted the increasingly large proportion of executive

remuneration accounted for by shares granted under long-term incentive plans

(LTIPs). LTIPs set performance targets for executives, generally over a three-year

period, with shares being granted on a rolling, pro-rata basis depending on how far

each target has been met. Under the FRC’s UK Corporate Governance Code,

premium listed companies should already ensure that shares are held by

executives for at least three years. LTIPs are intended to provide a strong link

between executive pay and long-term company performance, but concerns have

been raised over their growing complexity and the potential risk of LTIP targets not

always being consistent with long-term decision-making at quoted companies.

1.41 Just over a third of respondents addressed this question. Of those, a large majority

expressed concern that LTIPs are not adequately aligning executive remuneration

with long-term company performance. A significant number of these respondents

argued that the targets in many LTIPs are too narrowly focused on share price

growth and short-term returns to shareholders, rather than on broader objectives of

relevance to a company’s long-term sustainability. Some respondents said that an

execessive focus on ‘earnings per share’ targets was particularly prevalent in

FTSE250 companies. There were calls by some investors and academics for

‘economic benefits’ to be measured in LTIPs (e.g. measuring companies’ return on

capital investments), and by wider civil society groups and some think-tanks for

ESG (economic, social and governance) targets to feature more prominently in

LTIPs.

1.42 A number of companies said they would prefer to be more innovative in their

approach to LTIP design, or even to replace or augment LTIPs with ‘restricted share

awards’, in which executives automatically receive share options each year without

specific performance conditions but at a lower level than they would have received

under LTIPs. However, they expressed concern that shareholders and their

advisers would not support an approach to executive share awards that differed

significantly from current market practice. This concern was partly borne out by the

responses of the investment community to this question. Many said that LTIPs had

become too complicated and did not always provide assurances on the link to long-

term company performance. However, a significant number of investors, and other

respondents, also expressed concern at removing performance targets entirely from

share awards, and said restricted share awards could end up rewarding poor

performance.

Government response: Corporate Governance Reform

1.43 A substantial minority of respondents who considered this question (in particular

respondents from wider civil society, some think-tanks and academia) argued that

there should be a rebalancing of executive remuneration towards fixed salary and

away from share-based variable pay. A common argument was that this would

enable CEOs to take longer-term decisions without wondering how they might

impact on LTIP or other variable pay targets over the next three years. Against this,

other respondents argued that CEOs and other executives should be required to

build up shares of at least twice their basic salary, in order to give them a potentially

long-term stake in the company’s future. One think-tank said that this could be

augmented by annual reporting of the impact of share price movements on a CEO’s

total share wealth in their company, providing a clear demonstration of the CEO’s

performance and the impact of her or his performance on their own wealth over the

long term.

1.44 On the specific question of holding periods for shares granted to executives, almost

two thirds of the respondents who addressed this question agreed that the UK

Corporate Governance Code should provide for vesting and post-vesting holding

periods of at least five years, compared to the current three years. Several of these

respondents also proposed that the Code should set out a minimum period of time

that executives should hold their shares after they have left the company.

Government conclusions

Addressing significant shareholder dissent on executive pay

1.45 The Government accepts the concerns raised by a majority of respondents that

shareholders need an enhanced ability to hold to account the small minority of

companies that experience significant investor dissent on executive pay. A

shareholder vote of 20% or more against the Directors’ Remuneration Report

(DRR) is a rare occurence and can indicate that the remuneration committee has

substantially misjudged one or more elements of the DRR; for example, by failing to

exercise sufficient discretion when executive pay outcomes do not align with

shareholder expectations based on company performance over the past year, or

are not clearly in line with the company’s executive remuneration policy.

Action 1

To provide greater confidence that companies experiencing dissent will take visible

and effective remedial action, the Government will:

(i) Invite the FRC to revise its UK Corporate Governance Code to set out

the steps that companies should take when they encounter significant

shareholder opposition to executive pay; and

Government response: Corporate Governance Reform

(ii) Invite the Investment Association to implement a proposal it made in its

response to the green paper to maintain a public register of listed

companies encountering shareholder opposition of 20% or more to

executive pay and other resolutions, along with a record of what these

companies say they are doing to address concerns.

1.46 The FRC will need to consult on the new measures in the UK Corporate

Governance Code, and the views of companies, investors and other stakeholders

will be important in shaping the final set of provisions. They might include, for

example, provisions for companies to respond publicly to dissent within a certain

time period, or to verify that dissent has been sufficiently addressed by putting the

company’s existing or revised remuneration policy to a shareholder vote at the next

AGM. The FRC’s consultation will also provide an opportunity for stakeholders to

comment on the scope of application of new measures covering shareholder

dissent on executive pay; for example, whether they should apply to all premium

listed companies or only to FTSE350 premium listed companies.

1.47 The Government will monitor the impact of both measures carefully once they are in

place. The Government will consider further action at a future point unless there is

clear evidence that companies are taking active and effective steps to respond to

significant shareholder concerns about executive pay outcomes.

Broadening the role of remuneration committees

1.48 The UK Corporate Governance Code already asks premium listed companies to “be

sensitive to pay and employment conditions elsewhere in the group, especially

when determining annual [executive] salary increases”. However, as flagged by

many green paper respondents and the BEIS Committee, this existing principle of

good corporate governance is not in most cases driving meaningful engagement by

remuneration committees with the wider workforce, nor ensuring that wider pay and

conditions are taken properly and demonstrably into account in the setting of

executive remuneration.

Action 2

The Government will invite the FRC to consult on a revision to the UK Corporate

Governance Code and its supporting guidance to give remuneration committees

greater responsibility for demonstrating how pay and incentives align across the

company, and to explain to the workforce each year how decisions on executive

pay reflect wider pay policy. This consultation will provide an opportunity to seek

best practice examples from those remuneration committees that already

proactively engage with the wider workforce, while enabling current work in this

area by a number of prominent think-tanks to be taken into account.

Government response: Corporate Governance Reform

1.49 The Government will also ask the FRC to include in its consultation the proposed

new provision that the chairs of remuneration committees should have served for at

least 12 months on a remuneration committee, unless there is a clear and valid

explanation why this may not be approporiate or possible in a particular case.

Pay ratio reporting

1.50 The Government notes concerns raised during the consultation that the disclosure

of pay ratios across companies and sectors with different business models and

workforce profiles may lead to potentially misleading comparisons. However, the

Government agrees with the BEIS Committee, the investment community and many

think-tanks, that annual pay ratio reporting would provide a valuable and dynamic

reference point to help companies demonstrate to employees and investors alike

how executive remuneration relates to wider workforce pay at a given moment and

over time. It is right that a remuneration committee should be able and willing to

explain why a particular ratio is right for that particular company, and to explain any

changes to that ratio from year to year.

Action 3

The Government will introduce secondary legislation, to require quoted companies

to report annually in their remuneration report, the ratio of CEO pay to the average

pay of their UK workforce, along with a narrative explaining changes to that ratio

from year to year and how the ratio relates to pay and conditions across the wider

workforce.

1.51 The Government agrees with the BEIS Committee and numerous respondents that

a new pay ratio reporting requirement should, for reasons of consistency and

simplicity, cover UK employees only. Multinational companies would, however, be

free to publish a broader ratio alongside, covering all employees in their group.

1.52 The Government will give further consideration to the methodology for calculating

the ratio as well as including the option of reporting ratios by pay quartile. At this

stage, the Government proposes that the ratio should be calculated based on the

CEO’s total annual remuneration (as set out in the existing ‘Single Figure’ in the

Directors’ Remuneration Report) relative to the average total remuneration of the

company’s UK workforce. This will enable the new reporting requirement to be

based in most cases on existing pay roll data, while also complementing the

existing legislative requirement for companies to report the annual increase in CEO

pay compared to the annual increase across the average of the workforce.

1.53 Further details will be set out in a draft statutory instrument which will be published

later this year.

Government response: Corporate Governance Reform

Long-term incentive arrangements

1.54 The Government considers that poorly designed or explained LTIPs undermine

confidence in the link between executive remuneration and long-term company

performance. Investors must have confidence that LTIPs are driving behaviours and

decision-making which promote the long-term success of the company, and

executives correspondingly must have confidence that the targets in LTIPs are well

understood by shareholders and give them a clear mandate to pursue longer-term

goals.

1.55 Part of the challenge that the green paper consultation has highlighted is the risk of

LTIPs leading to executive share awards that are inconsistent with investors’

original expectations. The Government therefore accepts the arguments of a

number of investors and other respondents that companies’ executive remuneration

policies should be required to set out more clearly the potential remuneration

outcomes of LTIPs under a range of scenarios, including significant share price

growth.

Action 4

The Government will introduce secondary legislation to require quoted companies

to provide a clearer explanation in remuneration policies of the range of potential

outcomes from complex, share-based incentive schemes.

1.56 This new requirement will build on the existing requirements governing the content

of remuneration policies set out in Schedule 8 of the Large and Medium-sized

Companies and Groups (Accounts and Reports) Regulations 2008

. The

Government will also invite the FRC to seek stakeholder views during its

forthcoming consultation on whether and how new principles or detailed guidance

on share-based remuneration could be included in the revised UK Corporate

Governance Code.

1.57 While noting the concerns raised in some responses about LTIPs, the Government

is not convinced that their abolition is justified. Properly designed and set out, they

can provide a powerful driver of long-term executive decision-making. However, the

Government agrees with many investors and other respondents to the green paper

who argued that companies should avoid conforming rigidly to a standard LTIP

model and should consider adopting other remuneration structures which may be

more appropriate to their business model or strategy.

http://www.legislation.gov.uk/uksi/2008/410/schedule/8/made

Government response: Corporate Governance Reform

1.58 The Government notes and commends existing industry-led action in this area,

notably through the Investment Association Executive Remuneration Working

Group’s report last year

, to encourage a more flexible and tailored approach to

linking executive remuneration to long-term company performance. Progress here

will, though, require an open-minded and constructive response by investors and

their advisers to any new or novel long-term remuneration proposals put forward by

companies.

Holding periods for share-based remuneration

1.59 The Government agrees with the BEIS Committee and others that the normal

holding period for share-based remuneration (including both a vesting and post-

vesting holding period) should be at least five years in normal business

circumstances, rather than the three-year minimum set out currently in the UK

Corporate Governance Code. Lengthening the holding period in this way would also

bring rules for executive remuneration closer to those introduced in 2015 for the

banking sector, which lengthened deferral periods for variable pay to seven years.

Action 5

The Government will invite the FRC to consult on a proposal to increase from three

to five years the minimum holding period for share-based remuneration.

Other issues

1.60 The green paper consulted on four other options in the executive pay chapter:

 The possibility of establishing a Shareholder Committee to oversee executive

pay, directors’ nominations and strategy at every quoted company;

 Mandatory disclosure of investor voting records;

 Increasing retail investor voting through industry-led action or legislative

change; and

 Adding further regulation to the existing disclosure framework for directors’

bonus targets.

The Government will not be taking forward new measures in these areas at this

time.

1.61 On the Shareholder Committee option, the Government recognises the concerns of

companies, many investors and other respondents that this option would be difficult

https://www.theinvestmentassociation.org/assets/files/press/2016/ERWG%20Final%20Report%20July%202

016.pdf

Government response: Corporate Governance Reform

to implement practically and could moreover undermine the UK’s unitary board

system.

1.62 On disclosure of investor voting records, the Government accepts that significant

progress is already being made through industry-led action, with 72% of UK

institutional investors now disclosing their voting records in full. The Government

will continue to review progress in this area.

1.63 On retail investor voting, the Government recognises that electronic shareholdings

reduce costs and delays in retail investment. However, it is also recognised that the

growing trend towards holding shares through an intermediary may make it more

complicated for those investors to acquire and exercise voting rights over shares.

We will keep this issue under review, and do not rule out new measures in due

course.

1.64 On disclosure of directors’ bonus targets, the Government acknowledges that

companies have made substantial progress towards greater and more timely

disclosure in recent years in response to pressure from institutional investors.

FTSE100 companies are now disclosing most bonus targets in full prospectively,

with the remainder generally being disclosed in full within the following two years.

The Government is not convinced that further regulatory intervention is needed at

this time but will look to institutional investors to continue to set high expectations

for companies and will continue to monitor progress made by companies in this

area.

Government response: Corporate Governance Reform

2. Strengthening the employee, customer

and wider stakeholder voice

This section summarises consultation responses to the chapter on

strengthening the employee, customer and wider stakeholder voice

and sets out the Government’s plans.

2.1 Many companies and their boards recognise the wider societal responsibilities that

they have and the benefit they gain through wider engagement around their

business activities. However, examples of poor corporate practice where the views

and needs of key stakeholders – employees and workers, suppliers, customers and

pension beneficiaries – have not been given appropriate consideration have raised

concerns about how well UK companies are taking into account the views of key

corporate stakeholders.

2.2 Section 172 of the Companies Act 2006 gives company directors a responsibility to

create successful businesses for the benefit of shareholders, whilst having regard

to a range of other interests. The green paper asked whether the voice of key

corporate stakeholders at board level needs to be strengthened to enable directors

to discharge their duty under section 172 effectively. It sought views on a set of

specific options whilst making it clear that it was not proposing to mandate the

direct appointment of employees or other interested parties to company boards.

2.3 Over 240 of respondents gave a clear view on the specific question of whether the

stakeholder voice should be strengthened. Of these 210 (around 86%) agreed that

the stakeholder voice should be strengthened with only 33 (around 14%)

disagreeing.

Summary of responses

Question 7: How can the way in which the interests of employees, customers and

wider stakeholders are taken into account at board level in large UK companies be

strengthened? Are there any existing examples of good practice that you would like

to draw to our attention? Which, if any, of the options (or combination of options)

described in the green paper would you support? Please explain your reasons.

2.4 The green paper sought views on the following three options which described

mechanisms to strengthen the stakeholder voice at board level:

Government response: Corporate Governance Reform

(i) Designate existing non-executive directors to ensure that the voices of key

interested groups, especially that of employees, are being heard at board

level;

(ii) Create stakeholder advisory panels; or

(iii) Appoint individual stakeholder representatives to company boards.

2.5 Most respondents agreed that companies should seek to strengthen the voice of

stakeholders but there was no consensus on which of the three proposed options

would work best. Each of the options had its supporters and opponents. Examples

of best practice cited in the responses suggest that all three of the different options

to strengthen the stakeholder voice at board level have worked well in particular

circumstances and indeed that other approaches may also be valuable. Many

responses emphasised that there should be flexibility for individual companies to

choose the right mechanism or combination of mechanisms for them, because no

single approach would be suitable for all.

2.6 The green paper also asked for views on a fourth option involving the strengthening

of company reporting requirements related to stakeholder engagement. This was

well-received although views differed on exactly what was needed.

2.7 Further detail on each of these options is given below.

Designation of existing non-executive directors

2.8 There were similar levels of support and opposition for the option of designating a

non-executive director to ensure stakeholder voices are heard at board level.

2.9 This option was seen as the most feasible by several respondents, with the level of

support and resource given to the non-executive director critical to success.

Respondents suggested that a designated non-executive director: should be able to

meet management, workforce and unions to discuss matters of concern; should

have access to employee engagement survey results and other statistics; should be

able to consult key suppliers; and should be able to review customer feedback

including complaints.

2.10 It was also suggested that there could be more than one designated non-executive

director acting as a point of liaison for different stakeholder groups including

workers, suppliers, customers, consumers, community, and environmental groups.

Many responses reiterated the view that combining designated non-executive

directors with advisory panels would strengthen both.

2.11 The main risks highlighted with regard to this option were that if care was not taken,

designating a single non-executive director to this role could undermine a sense of

collective board responsibility for stakeholder engagement. Furthermore, if the non-

Government response: Corporate Governance Reform

executive director were expected to promote rather than channel the interests of

particular groups, the role could potentially conflict with the duties that directors hold

in common and compromise independence. There were also concerns that

designated non-executive directors could find themselves isolated on the board,

unable to provide an effective challenge.

Stakeholder advisory panels

2.12 About four in ten of the responses to the green paper expressed a view on this

option. Of these, a small majority suggested that stakeholder advisory panels could

play a useful role, while the rest expressed concern about this option, particularly if

it were made mandatory.

2.13 Concerns raised related to: how panel members would be chosen and how

representative they would be; whether the panel would have enough ‘teeth’ and

status to challenge the board; how much resource it would require; and whether

diverse stakeholder interests could be made to cohere.

2.14 Various suggestions were made about how the members of advisory panels could

be selected. One response suggested appointing an independent chair to oversee

the process. Some said that the panel should represent stakeholder groups on

whom the company’s activities had most impact. One response suggested that if

there were no employee representative on the board, more than a third of the panel

should be made up of employee representatives with the rest representing

shareholders and other stakeholders.

2.15 A number of suggestions were made on how to ensure advisory panels had

influence. Many responses suggested that the panel should be able to issue an

annual public statement (potentially as part of the annual report) and commission

independent investigations, in order to maintain its independent voice. Other

comments suggested that a panel could provide an effective way to test materiality

assumptions with relevant stakeholders and ensure board and management are

clear about key risks and amplify perspectives that may be absent or weak at board

level. It was also suggested that a panel could have a formal consultative role with

the remuneration committee in reviewing executive pay policies and performance.

2.16 A number of responses suggested combining stakeholder advisory panels with a

designated non-executive director to ensure that the panel had a clear channel into

the boardroom whilst retaining a plurality of perspectives.

Appointment of individual stakeholder representatives to boards

2.17 There were a wide range of views regarding the appointment of individual

stakeholder representatives to company boards. About 40% of those that

responded supported this option, while 60% were sceptical. Other responses were

Government response: Corporate Governance Reform

ambivalent. Most of the responses to this question discussed employee

representatives, but a few mentioned other stakeholder groups, such as customers,

suppliers and communities. Many responses identified positive benefits from

appointing an employee director, but felt it should be at the discretion of the

company. A smaller group of respondents advocated a mandatory approach.

2.18 Amongst those who favoured the concept, the main advantages identified were that

it would:

 Bring a valuable new perspective and operational knowledge to the board;

 Encourage boards to take a long-term approach;

 Improve board diversity; and

 Help to challenge ‘group-think’.

2.19 The main concern raised related to the impact on the unitary board structure with

most responses - whether supporting or opposing the option – saying they were in

favour of retaining unitary boards. Specific concerns included:

 The potential for conflicts of interest given that directors have specific legal

responsibilities in relation to shareholders;

 The danger of creating two classes of director, particularly if directors no longer

share a common purpose;

 The risk of delayed decision-making;

 The possibility of a capture of interests, with some stakeholders being

prioritised over others; and

 The practicalities of identifying a suitable individual.

2.20 The majority of respondents who supported this option believed that it was

compatible with a unitary board structure and common purpose. Their responses

emphasised the need to clarify that the purpose of a stakeholder director would be

to provide perspective rather than represent the interests of a particular stakeholder

group, and that the stakeholder director should have the same duties and

responsibilities as other directors, including a duty of confidentiality. Careful thought

would need to be given to eligibility criteria and selection.

2.21 A number of responses emphasised the need for appropriate training, induction and

support, suggesting the chair should be responsible for this. Some responses

suggested that a minimum of two directors, but preferably around a third should be

drawn from employees, in part to avoid the ‘lone voice’ phenomenon. A number of

responses also raised the importance of a union infrastructure for facilitating

employee directors.

Government response: Corporate Governance Reform

Strengthening stakeholder engagement reporting requirements

2.22 About four in ten responses commented on the fourth option – the strengthening of

reporting requirements related to stakeholder engagement. Of these, a large

majority (around four fifths) favoured stronger reporting requirements. Those in

favour argued that stronger reporting would enhance the operation of section 172 of

the Companies Act 2006 and enable companies to showcase the considerable

good practice that already occurs. Those who were not in favour of stronger

reporting requirements cited concerns about burdens on business and the risk of

companies not providing meaningful disclosures. A number of respondents

suggested that much could be achieved through the sharing of good practice or

more detailed guidance from the FRC on what the Strategic Report should contain.

2.23 While some respondents felt that the focus should be on reporting the mechanisms

that company boards use to engage stakeholders, others felt that more reporting

was needed on stakeholder impacts or relationships themselves. Others suggested

that company boards should first-and-foremost report which stakeholders the

company board considers to be material to the business and how this decision was

made. Another suggestion was that the skills and background of company directors

in relation to stakeholders and stakeholder matters should be disclosed. Many

examples of existing good practice and useful guidance on reporting stakeholder-

related company information were cited.

2.24 A number of respondents linked new reporting requirements to some of the different

mechanisms proposed as options (i) to (iii), for example that any non-executive

director designated to represent stakeholder views could be given a requirement to

report on their role. However, other respondents did not agree on placing any new

reporting requirement on just one company director and stressed the need to

uphold the collective responsibility of company boards. The existing length of some

annual reports was mentioned a number of times alongside the suggestion that

disclosures around stakeholder issues may be better suited to company websites.

Other issues – section 172 Companies Act 2006

2.25 In addition to responding to the proposed options in the green paper on how to

strengthen stakeholder voice at board level, several respondents made suggestions

about the relationship between companies and stakeholders more generally.

2.26 Around a quarter of responses mentioned the wording of section 172. Just under

half of those respondents favoured amending section 172. They included a number

of wider civil society organisations and trade unions who want directors to be able

to pay greater heed to the interests of wider stakeholders such as employees and

communities and the goal of long-term value creation.

Government response: Corporate Governance Reform

2.27 There were, however, a similar number of responses which defended the current

formulation of section 172. Of these many felt that the current formulation could be

made to work more effectively through raising awareness, increased guidance and

improved reporting. Some thought that companies should make a “statement of

purpose” in their articles of association to clarify their ultimate goals and aspirations.

Question 8: Which type of company do you think should be the focus for any steps

to strengthen the stakeholder voice? Should there be an employee number or other

size threshold?

2.28 Around three in ten respondents provided comments on this question. Views on

which companies should be the focus for any steps to strengthen the stakeholder

voice were very varied. A number of respondents felt that the initial focus should be

narrow and then broadened to cover a wider range of companies over time.

Although some respondents felt that the focus should be just on FTSE companies,

a significant number felt that private companies, at least of a large size, should also

be included.

2.29 Many respondents felt that the right approach was to target companies based on

employee numbers, but the threshold suggested in this area varied from 250

employees to more than 5,000. Additionally, respondents questioned whether any

threshold should be based on the number of UK employees or global employees.

Some concerns were raised that thresholds can have unintended consequences.

For example, a threshold based on employee numbers could lead to a company

artificially maintaining low employee numbers by outsourcing its workforce. Another

question raised was whether corporate subsidiaries should be treated separately or

as part of their group.

2.30 A good number of respondents felt that the right approach was to use existing legal

thresholds, for example those used for accounting purposes or for other business

reporting. A number said that the scope should depend on the approach taken to

implementation. For example, any new requirement to report in a Strategic Report

should be for all those companies who need to provide a Strategic Report whereas

any new UK Corporate Governance Code requirements should apply only to those

to whom the Code applies.

Question 9: How should reform be taken forward? Should a legislative, code-based

or voluntary approach be used to drive change? Please explain your reasons,

including any evidence on likely costs and benefits.

2.31 A minority of respondents, including the trade unions, favoured a legislative

approach to increasing employee representation and influence at boardroom level

arguing that, without some level of legal compulsion, change would be slow or non-

existent. Others felt that the cultural change needed could not be achieved through

Government response: Corporate Governance Reform

legislation. A number of respondents thought that legislation should only be used in

relation to new reporting requirements.

2.32 Considerable support was received for the existing “comply or explain” approach of

the UK Corporate Governance Code. Some respondents felt that change could be

achieved through a purely voluntary or code based approach particularly if more

detailed guidance was also provided. Finally, a number of respondents felt that

legislative options could usefully be held in reserve in case sufficient progress was

not made through other routes.

2.33 Only a handful of responses provided comments on the likely costs and benefits of

reform in this area. The costs cited were generally around burdens on business and

this was accompanied by a request that any new requirements be effective and

proportionate. The benefits cited were generally in relation to the long-term

business benefits of appropriate stakeholder management, not least through risk

mitigation.

Government conclusions

Strengthening reporting requirements relating to boardroom engagement with

employees and other stakeholders

2.34 Company directors have certain statutory duties to their company in relation to

stakeholders. Directors of all UK companies, irrespective of their size have an

ultimate duty to promote the success of their company for the benefit of its

members which, in most cases, means its shareholders, unless the company has

set out a different purpose in its company articles. However, in doing so, they must

have regard to a number of specified stakeholder and wider issues including the

interests of the company’s employees and the need to foster business relationships

with customers and suppliers.

Government response: Corporate Governance Reform

Table 1: Text of Section 172 of the Companies Act 2006

2.35 There was strong support from respondents to the green paper for strengthening

reporting requirements on how company directors are having regard to

stakeholders as required by section 172. This was also a recommendation made by

the BEIS Committee report of April 2017. The Government agrees. A formal

reporting requirement will impel directors to think more carefully about how they are

taking account of these wider matters. More transparency will also help to reassure

investors, creditors and others that companies are being run with a view to their

long-term sustainability. In addition, better reporting should improve the visibility of

good boardroom practice, allowing it to be replicated and adopted more widely.

http://www.legislation.gov.uk/ukpga/2006/46/section/172

Duty to promote the success of the company

(1) A director of a company must act in the way he considers, in good faith,

would be most likely to promote the success of the company for the benefit of its

members as a whole, and in doing so have regard (amongst other matters) to —

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,

customers and others,

(d) the impact of the company's operations on the community and the

environment,

(e) the desirability of the company maintaining a reputation for high

standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include

purposes other than the benefit of its members, subsection (1) has effect as if

the reference to promoting the success of the company for the benefit of its

members were to achieving those purposes.

(3) The duty imposed by this section has effect subject to any enactment or rule

of law requiring directors, in certain circumstances, to consider or act in the

interests of creditors of the company.

Government response: Corporate Governance Reform

2.36 The operation of the new reporting requirement will be subject to further

consideration. The Government envisages that it would include a requirement to

explain how the company has identified and sought the views of key stakeholders,

why the mechanisms adopted were appropriate and how this information has

influenced decision-making in the boardroom. The Government has noted that

many green paper respondents felt that such disclosures should be included on

company websites as well as in the company’s annual Strategic Report on the

grounds that the information would have as much relevance to wider interest

groups as it would for shareholders, and will consider the idea further.

2.37 Further consideration will also be given to which companies should be subject to

the new reporting requirement. All company directors are subject to the duty in

section 172 so there are arguments, in principle, for a wide range of businesses to

be within scope. However, a proportionate approach is needed as this will be a new

regulatory burden. A threshold based on employee numbers seems reasonable,

especially as one of the key corporate stakeholders is employees.

2.38 An existing threshold for company reporting on action to consult and inform

employees about company performance and other issues is where the weekly

average number of UK-based employees exceeds 250

. However, the aggregate

burdens on business at setting the threshold this low could be high (although small

at the individual company level). The Government’s initial view is therefore that a

threshold of 1,000 employees should be used, but this will be subject to further

consideration.

Action 6

The Government will introduce secondary legislation to require all companies of a

significant size (private as well as public) to explain how their directors comply with

the requirements of section 172 (Companies Act 2006) to have regard to employee

interests and to fostering relationships with suppliers, customers and others.

Improving board-level engagement with employees and other stakeholders through

changes to the UK Corporate Governance Code and more guidance.

2.39 Consultation responses indicated strong support for strengthening the stakeholder

voice in the boardroom in order to deliver long-term sustainability and greater board

effectiveness. The BEIS Committee report of April 2017 on corporate governance

also recommended that more companies be encouraged to establish stakeholder

advisory panels and appoint workers to company boards. The new reporting

requirement described above is expected to encourage directors to give more

Part 4 of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports)

Regulations 2008, SI 2008/410

Government response: Corporate Governance Reform

thought to how they engage with employees and other stakeholders. However, on

its own, it does not provide any leadership or guidance on how directors should

ensure, for example, that they are engaging effectively with employees.

2.40 The importance of having an effective worker voice, that of a key corporate

stakeholders, was also emphasised in the Taylor Review of Modern Working

Practices. The benefits cited included enabling managers and company owners to

receive timely feedback about business practices from those delivering them,

enabling the workforce to raise concerns; and giving the workforce an ability to hear

and influence strategic issues which may have an impact on them.

2.41 It is clear that many companies already have mechanisms in place to ensure that

employee and other stakeholder voices are heard and taken into account in

boardroom decision-making. The Government, however, wants to ensure that good

practice is adopted more widely and more consistently.

2.42 Leadership in this area is needed from the UK’s largest, premium listed companies.

The Government, therefore, intends to invite the FRC to consult on the

development of a new Code principle establishing the importance of strengthening

the voice of employees and other stakeholder interests at board level as an

important element of running a sustainable business. The Government expects

guidance to be prepared by the FRC in collaboration with business on the best

practice mechanisms that company boards could adopt to comply with the new

principle. Indeed, ICSA (the Governance Institute) and the Investment Association

are already developing practical guidance on boardroom engagement.

2.43 In relation to employees, however, the Government believes that a stronger sense

of direction is required to ensure that there is real change and that all our leading

companies have effective mechanisms to engage with employees at boardroom

level. There is a wide consensus that employee engagement is associated with

greater firm performance, higher customer loyalty, better retention levels and higher

productivity

. The Government will therefore be inviting the FRC to consider and

consult on a specific Code provision requiring premium listed companies to adopt,

on a “comply or explain” basis, one of three employee engagement mechanisms: a

designated non-executive director; a formal employee advisory council; or a director

from the workforce.

A recent Gallop poll covering businesses across 73 countries found that firms in the top quartile of based

on their employee engagement scores outperformed the bottom quartile having 21% more profitability and

20% more productivity. http://www.gallup.com/services/191489/q12-meta-analysis-report-2016.aspx?ays=n

Government response: Corporate Governance Reform

2.44 The UK Corporate Governance Code applies to premium listed companies which

count some of the UK’s biggest and most influential businesses in their number.

However, the impact of good governance in premium listed companies can have a

strong influence more widely, for example on corporate behaviour in their supply

chains. Indeed, noting the benefits of high standards in premium listed companies,

the influence of the Code itself can clearly extend to other types of business. Many

smaller listed companies, for example, follow the Quoted Company Alliance’s

Corporate Governance Code for Small and Mid-Size Quoted Companies which

adopts key elements of the FRC’s Code. Furthermore, the new Code principle

establishing the importance of strengthening the voice of employees and other non-

shareholder interests at board level could be adopted as part of the set of corporate

governance principles that will be developed for large private companies –

discussed in the next section of this response document.

Action 7

The Government will invite the FRC to consult on the development of a new Code

principle establishing the importance of strengthening the voice of employees and

other non-shareholder interests at board level as an important component of

running a sustainable business.

As a part of developing this new principle, the Government will invite the FRC to

consider and consult on a specific Code provision requiring premium listed

companies to adopt, on a “comply or explain” basis, one of three employee

engagement mechanisms: a designated non-executive director; a formal employee

advisory council; or a director from the workforce.

Action 8

The Government will also ask ICSA (the Governance Institute) and the Investment

Association to complete their joint guidance on practical ways in which companies

can engage with their employees and other stakeholders at board level.

2.45 Finally, the Government wishes to respond constructively to the debate on the

wording of section 172 that arose from the green paper. The Government has no

plans to amend the law, but considers it would be useful to have more guidance for

companies of all sizes on how the UK’s “enlightened shareholder value” model

enshrined in section 172 should work in practice.

2.46 As an initial step, the Government has asked the GC100 group of the largest listed

companies to prepare and publish new advice and guidance on the practical

boardroom interpretation of the directors’ duty in section 172 of the Companies Act

2006. The Government hopes that this will stimulate wider debate and

understanding of the flexibilities inherent in the existing wording of section 172. It

Government response: Corporate Governance Reform

would welcome other practical, industry-led contributions. The Government also

notes the recommendations in relation to employee voice made by Matthew Taylor

in his Review of Modern Working Practices. The Government will consider these

and respond to the whole report later this year.

Action 9

The Government invites the GC100 group of the largest listed companies to

complete the work it is undertaking to prepare and publish new advice and

guidance on the practical interpretation of the directors’ duty in section 172 of the

Companies Act 2006.

Summary

2.47 The Government believes that this combination of Code changes and better

guidance on boardroom engagement with employees and other stakeholders,

underpinned with a new statutory reporting requirement can deliver real change in

corporate practice. The Government will, however, monitor the extent to which

these measures are effective and will consider further action in the future if

progress is insufficient.

Government response: Corporate Governance Reform

3. Corporate governance in large privately-

held businesses

This section summarises responses to chapter 3 of the green paper

and sets out how the Government intends to strengthen the

corporate governance framework for the UK’s largest private

companies.

3.1 The green paper explored whether, and to what extent, the UK’s largest privately-

held businesses should meet higher minimum corporate governance and reporting

standards. The UK’s strongest corporate governance and reporting standards are

currently focused on public companies where owners or shareholders are often

distant from the executives running the company. However, the green paper set out

reasons why similar standards might need to apply to privately-held businesses,

including the point that good governance can go beyond the relationship between

the owners and the managers of a company, and that there are other stakeholders,

including employees, suppliers and customers with a strong and legitimate interest

in the way a company is run.

3.2 The green paper set out a number of options for strengthening standards of

corporate governance in private companies including the extension of the UK

Corporate Governance Code or the development of a broader set of best practice

principles.

3.3 In addition to gathering views on whether it was now appropriate to develop a

stronger corporate governance framework for the UK’s largest privately-held

businesses, the green paper invited views on which businesses should be within

scope and on how any strengthening should be implemented and monitored.

Summary of responses

Question 10: What is your view of the case for strengthening the corporate

governance framework for the UK’s largest privately-held businesses? What do you

see as the benefits for doing so? What are the risks to be considered? Are there any

existing examples of good practice in privately-held businesses that you would like

to draw to our attention?

Government response: Corporate Governance Reform

3.4 Over four fifths of respondents responding to this section of the green paper,

favoured strengthening corporate governance standards for the UK’s largest

privately-held businesses. Many argued that the social and economic impact of

large private companies can be as great as that of listed companies and can pose

similar risks for pensioners, employees, supply chains, local communities and

others. Some argued that the privilege of limited liability status had to be earned,

and that it carried with it an expectation that companies would be run responsibly.

3.5 The consultation brought to light examples of best practice demonstrating how a

number of large privately-owned companies understand the benefits of well-

executed governance and manage their business through well defined board

responsibilities, high levels of transparency and ethical business conduct that

shows consideration for employees and wider stakeholders’ interests. Several

leading private companies already use the UK Corporate Governance Code as a

benchmark which they can adapt to suit their own circumstances, for example

adopting the provisions relating to the use of non-executive directors and the

appointment of audit, nomination and remuneration committees. Other private

companies already make their annual report and accounts easily accessible on their

website.

3.6 Most of the business bodies that responded to the consultation, agreed that

worthwhile corporate governance principles for privately-held businesses could be

developed in the areas of board leadership, effectiveness, and accountability.

3.7 Many respondents argued that, regardless of a company’s particular legal status,

adhering to the highest standards of corporate governance can deliver business

benefits by reassuring the public and investors, and increasing international

reputation. In addition, some believed it might help to counter the trend of

companies de-listing from public markets. This trend was attributed, in part at least,

to a wish to avoid the higher levels of transparency associated with listed company

status.

3.8 Most institutional investors who responded to this section highlighted how good

governance can ensure a company’s long-term success, building and sustaining the

confidence of banks, investors and suppliers, enabling such businesses to have

better access to external finance at a lower cost and on a longer-term basis than

would otherwise be the case.

3.9 Several respondents argued that any new measures proposed in this sphere should

be tailored, proportionate and avoid duplication. Some responses made the point

that examples of mismanagement were not just a peculiarity of privately-owned

businesses but also occurred in listed companies, which were already subject to

stricter UK Corporate Governance Codes. Some respondents cautioned that a rigid

Government response: Corporate Governance Reform

codification of corporate governance and an inflexible approach to implementation

would affect the competitiveness of companies.

Question 11: If you think that the corporate governance framework should be

strengthened for the largest privately-held businesses, which businesses should be

in scope? Where should any size threshold be set?

3.10 A little over a quarter of respondents to the consultation answered this question.

Although there was no unanimous view as to the appropriate threshold, over two

thirds of those responding thought that only the largest businesses should be

subject to a stronger corporate governance framework.

3.11 Around a third of those responding to this question expressed a preference for a

threshold based on the number of employees. However, views differed on where

any size threshold should be set. Professional advisers, particularly law firms,

tended to recommend use of thresholds already defined in the Companies Act, but

a larger number suggested that only businesses with at least 1,000 employees

should be within scope. The BEIS Committee, for example, in its separate report on

corporate governance, suggested that a stronger corporate governance framework

should apply initially to the largest employers with over 2,000 employees.

3.12 A further third of those responding made the point that an employee number

criteria, on its own, would not bring all companies with a significant public interest

aspect or economic significance within scope. They suggested an additional

balance sheet and turnover threshold. There were a number of responses in favour

of a specific combination of employee size (>1,000) and turnover (>£36m).

3.13 A minority of those responding considered that it would be important to bring into

scope entities that deliver public services, raise significant amounts of debt or have

a high number of pension scheme beneficiaries, irrespective of their size.

3.14 Some respondents suggested that subsidiaries should not be covered, if the

information required of them was already captured at group level, or if they were

subsidiaries of foreign companies already subject to strong domestic corporate

governance requirements. The responses indicated broad support for introducing

stronger requirements: that the largest businesses, irrespective of their legal status,

have the greatest potential to impact wider communities through their employees,

suppliers, customers and others.

Government response: Corporate Governance Reform

Question 12: If you think that strengthening is needed, how should this be

achieved? Should legislation be used or would a voluntary approach be preferable?

How could compliance be monitored?

3.15 There was strong support for the development of a corporate governance

framework for private companies. However, views differed on who should lead this

work and whether the existing UK Corporate Governance Code for premium listed

companies was the right starting point. In general, while acknowledging that some

of the features of the Code could apply to privately-owned businesses, most

respondents expressed a preference for the development of a bespoke set of

principles. The wide range of ownership structures amongst privately-held

businesses pointed to principles being more realistic than more detailed provisions,

since principles could be applied to a broader range of businesses. A number of

organisations and companies offered their support in developing a framework for

private companies.

3.16 About 67% of respondents to a survey

carried out by the Institute of Directors

supported the idea of a code for private companies, although with the caveat that its

application should be phased, and the extent to which it applied should depend on

the size of the company.

3.17 Several respondents, including business representative bodies, urged the

avoidance of duplication and overlap. There were existing codes and sets of

principles that some private companies already applied such as the British Private

Equity and Venture Capital Association’s guidelines for its members. If companies

wanted to continue to use an existing code, this should be regarded as acceptable.

3.18 Some respondents linked better corporate governance and responsible behaviour

amongst private companies with compliance with section 172 of the Companies Act

2006. One respondent suggested that a better awareness and understanding of the

provisions of section 172 through the provision of guidance might result in better

corporate behaviour than an additional layer of governance compliance.

3.19 Most companies and business representative bodies warned against the

development and rigid application of a prescriptive set of corporate governance

rules. However, while only one in three respondents offered a view on the type of

approach that would be preferable, over two thirds of these respondents did not

believe that the approach should be completely voluntary. Instead they suggested

using legislation, mitigated by appropriate levels of proportionality and flexibility.

https://www.iod.com/news-campaigns/news/articles/Business-leaders-call-for-new-governance-code-for-

private-companies

Government response: Corporate Governance Reform

Question 13: Should non-financial reporting requirements in the future be applied

on the basis of a size threshold rather than based on the legal form of a business?

3.20 Only just over a quarter of respondents offered their views on this question.

However, these respondents were almost unanimous in agreeing that non-financial

reporting should be applied on the basis of size and impact, regardless of

businesses’ legal forms, though they did not provide a clear picture of the types of

disclosures sought. Many respondents recognised how business models have

become more complex and the range of stakeholders has increased. They

observed that the impact of failure for many private organisations is often greater for

external stakeholders than for the owners.

3.21 A number of responses highlighted the need to keep proportionality and flexibility in

mind, and to avoid introducing burdensome and costly requirements.

3.22 One business representative body referred to the variety of slightly differing

reporting thresholds and mechanisms for the range of existing non-financial

reporting requirements. It suggested a review of these thresholds to establish the

scope for rationalising and consolidating them.

Government conclusions

Development of corporate governance principles for private companies

3.23 The Government believes that the case has been made for strengthening the

corporate governance framework for the UK’s largest private companies. The

conduct and governance of large companies, whatever their legal status, has a

sizeable impact on the interests of employees, suppliers, customers and others. If

confidence in big business is to be enhanced, more large private companies should

be taking steps to reassure and demonstrate to the public that they are well run,

that they take a responsible approach to corporate governance and that they are

running their businesses with regard to the interests of wider stakeholders, as well

as the owners and shareholders.

3.24 The Government intends to take steps to encourage the development of a set of

corporate governance principles suitable for the widely varying circumstances and

ownership structures of large private companies. This approach is in line with the

recommendations made by the BEIS Committee in its April report on corporate

governance.

3.25 Application of these principles will be voluntary. This will allow companies to

continue to use other industry-developed codes and guidance, such as that

developed by the BVCA for private equity-owned businesses, if they are considered

Government response: Corporate Governance Reform

more appropriate. It will also allow companies to adopt, or continue to use their own

preferred approaches.

3.26 In order to ensure the principles are credible these need to be developed by people

with practical expertise and experience drawn from the relevant business

communities and professional bodies and led by a business figure with experience

of working in large private companies.

3.27 The Government expects that the FRC’s work to develop a new principle for the UK

Corporate Governance Code establishing the importance of strengthening the voice

of employees and other non-shareholder interests at board level, as outlined in the

previous section, to be reflected in the principles for private companies. Large

companies, irrespective of whether they are private or public need to show that they

are having regard to their wider stakeholders.

Action 10

The Government will invite the FRC to work with the Institute of Directors, the CBI,

the Institute for Family Business , the British Venture Capital Association and

others to develop a voluntary set of corporate governance principles for large

private companies under the chairmanship of a business figure with relevant

experience.

Transparency about corporate governance in large private companies

3.28 Many respondents observed that only companies listed on the London Stock

Exchange, are currently subject to corporate governance reporting requirements.

The Government considers that this form of reporting should be broadened to all

UK companies of a significant size.

3.29 A reporting requirement will provide much needed transparency, providing

customers, suppliers and wider society with the ability to understand the corporate

governance arrangements in a greater number of our leading companies. This

greater transparency will make it clear which companies have adopted good

practice and leave those who have not, open to wider questioning.

3.30 Having analysed green paper responses, considered the BEIS Committee’s

recommendations in their April 2017 report on corporate governance, and

undertaken additional impact analysis, we propose applying this reporting

requirement only to the very largest companies. Further consideration will be given

to size of company that will be covered by the new reporting requirement, but the

Government’s initial view is that it should apply to companies with over 2,000

employees. The requirement will apply to privately-owned and public companies

alike. However, there will be an exemption for premium listed companies who are

already required to report against the UK Corporate Governance Code or

Government response: Corporate Governance Reform

companies required by the Disclosure and Transparency Rules to issue a

Corporate Governance Statement. It is expected that a maximum of 1,400 (public

and private) UK companies would be within the scope of the new requirement if it is

set at 2,000 employees.

3.31 It is envisaged that the disclosure will include details of any UK Corporate

Governance Code or other formal set of corporate governance principles that the

company has adopted. Where a company departs from any of the provisions in the

adopted code or principles, it should explain which parts these are and the reasons

for the departure. If a company has decided not to adopt a formal code or set of

principles, it will be required to explain the reasons.

3.32 The disclosure will be included in the company’s Directors’ Report. We will also

require this information to be made available on the company’s website so that it is

easily accessible to external stakeholders who are not shareholders.

3.33 This approach will ensure that companies are free to identify and adopt the

corporate governance framework that best suits their business needs. The high

threshold combined with a “comply or explain” approach, will ensure appropriate

levels of proportionality and flexibility.

Action 11

The Government will introduce secondary legislation to require all companies of a

significant size to disclose their corporate governance arrangements in their

Directors’ Report and on their website, including whether they follow any formal

code.

The Government’s initial view is that these requirements should apply to companies

with more than 2,000 employees unless they are subject to an existing corporate

governance reporting requirement. The Government will also consider extending a

similar requirement to Limited Liability Partnerships (LLPs) of equivalent scale.

Government response: Corporate Governance Reform

4. Other issues

This section summarises responses to section 4 of the green paper

which invited suggestions on other ways in which the UK’s

corporate governance framework could be strengthened. It sets out

the Government’s proposals for strengthening the FRC’s ability to

monitor and enforce corporate governance reporting.

4.1 The green paper focused on three specific aspects of corporate governance where

the Government believes there could be particular scope to build on and enhance

the current framework. However, corporate governance is a broad topic and section

4 of the green paper was included to provide an opportunity for respondents to

make observations on the framework as a whole and to suggest other themes,

ideas and proposals that might be explored.

Summary of responses

Question 14: Is the current corporate governance framework in the UK providing

the right combination of high standards and low burdens? Apart from the issues

addressed specifically in this green paper can you suggest any other improvements

to the framework?

4.2 A total of 137 respondents had views on the current framework. Of these, about two

thirds thought that it generally provided the right combination of high standards and

low burdens, although a number of suggestions for improvement were made along

with other comments.

FRC’s powers

4.3 A number of respondents, particularly accountancy firms commented on the

adequacy of the FRC’s powers to oversee and enforce the corporate governance

framework. One leading accountancy firm, for example, suggested that corporate

governance statements made by companies should be brought within the scope of

the FRC’s existing corporate reporting review powers. The FRC itself argued that it

should have additional powers to ensure the integrity of corporate governance

reporting as well as additional responsibilities to sanction directors.

Government response: Corporate Governance Reform

Simplification of the UK Corporate Governance Code

4.4 A cross-section of respondents including companies, institutional investors,

academics and wider society bodies thought that there was scope to make the

FRC’s UK Corporate Governance Code simpler and focused more on overarching

principles. A typical comment was that the Code looked dated with a focus on board

structures and processes that were now well embedded. The focus should be on

compliance with a limited number of essential principles. Several institutional

investors favoured a comprehensive review of the corporate governance framework

to aid clarity and strengthen its application. One respondent referred to the need to

“clear the clutter from boardrooms” by focusing on essential principles.

Company culture and ethics

4.5 A number of respondents including wider society bodies, law firms and companies

themselves stressed the importance of having a good company culture and a code

of business conduct and ethics. Suggestions were made that the UK Corporate

Governance Code could be amended to be explicit in expecting boards to set a

company culture and to disclose whether it has a code of ethics.

Skills and competence of directors

4.6 A number of respondents pointed out the importance to good corporate governance

of competent executive and non-executive directors. A greater statutory articulation

of the duty of care and skill owed by directors might help. A number of institutional

investors called for more disclosure about the skills and experience of directors to

inform shareholder votes on appointments and re-appointments. The importance of

board effectiveness reviews required under the UK Corporate Governance Code

was stressed, along with calls for more to be done to ensure that non-executive

directors are properly trained and have a proper awareness of their duties. A

number of respondents called for directors to have a relevant qualification such as

membership of a recognised business-oriented professional body or accreditation

as a chartered director.

Enforcement of directors’ duties

4.7 Several respondents, particularly from the accountancy profession and some

academics, referred to a lack of effective mechanisms for sanctioning directors

when their conduct or competence fell short or where they failed to comply with

their duties. Some suggested that the list of people who can bring derivative actions

- currently restricted to shareholders - should be broadened. Others suggested that

an authority such as the FRC should be appointed with powers to intervene to

sanction directors. This should go broader than the FRC’s existing powers to

sanction directors who were members of professional accountancy and actuarial

bodies.

Government response: Corporate Governance Reform

4.8 Others, particularly some law firms took a different view, arguing that it would be

disproportionate to introduce a regulator for all directors, and that the FRC's current

role as disciplinary body for specific professions was a different activity. Instead,

better use should be made of existing powers to protect stakeholders set out in

employment, pensions and financial services legislation.

4.9 There were questions over whether the Company Directors Disqualification Act

1986 was working effectively and whether BEIS should make more use of existing

powers in the Companies Act 1985 to appoint inspectors.

4.10 One respondent suggested strengthening the ability of resigning directors to speak

more openly about the reasons for their resignation. Any director of a large

company who resigns should make a statement that there are no matters

surrounding the resignation which ought to be brought to the attention of

shareholders and if there are, what these matters are. On a related theme, one

professional body suggested that the Companies Act should be amended to give

company secretaries the same safeguards as are currently in place for auditors.

Long-termism

4.11 Several respondents wanted to see stronger shareholder voting rights for long-term

investors. Others thought that the FRC could make further changes to its UK

Corporate Governance Code to encourage long-termism. One respondent wanted a

stipulation that, before any share buyback, boards should confirm that employees

were being paid at least the living wage, that the company pension fund was

adequately funded and that the resources could not be better used for investment in

people or R&D. Another suggested that the consent of long-term shareholders

should be required before a takeover could be recommended by directors.

Protection of minority shareholders from a controlling shareholder

4.12 Institutional investors praised the Financial Conduct Authority (FCA) for introducing

a dual voting structure for the appointment of independent directors to help protect

the interests of minority shareholders against a controlling shareholder. Under the

new rules, any such appointments have to be approved both by the shareholders as

a whole and also by the independent shareholders. If the results conflict, then a

second vote of all shareholders has to take place on a simple majority basis. A

number of investors, however, thought that stronger safeguards were needed such

as excluding the controlling shareholder from any second vote, or excluding this

shareholder from the vote on the appointment of the chairman. Alternatively, the

Listing Rules could be amended to require premium listed companies to have a

majority free float.

Government response: Corporate Governance Reform

Other issues raised

4.13 Respondents made a number of other comments and suggestions. Amongst the

more significant were comments made by a number of respondents, particularly

wider society bodies suggesting that more could be done to extend principles of

stakeholder representation to pension and other fund management companies.

They could, for example, be required to state what account they have taken of the

interests of beneficiaries in setting the terms of their investment mandates, and

pension managers could do more to engage with savers to understand and then

reflect the views of the underlying beneficiaries.

4.14 On reporting, some accountancy firms in particular suggested that the Strategic

Report should include information and metrics about productivity within the

company and what steps were being taken to improve it.

4.15 Some respondents noted the lack of choice available to companies when they were

looking for executive search advisers or board effectiveness evaluators. It was

claimed that six firms accounted for 74% of board appointments to leading FTSE

companies and just four firms undertook about 75% of board evaluations.

Government conclusions

4.16 The Government notes that a clear majority of respondents to this part of the green

paper thought that the UK’s corporate governance framework generally provides

the right balance of high standards and low burdens. It has, however, taken careful

note of the comments and suggestions made. Action is already in train to address

some of the suggestions. The FRC, for example, has been undertaking a review of

the UK Corporate Governance Code to establish whether there is scope to simplify

it and place a renewed focus on key, overarching principles. It expects to announce

its findings shortly.

4.17 Other suggestions, for example about embedding the importance of company

culture and ethics, and providing more information for shareholders about the skills

and experience of directors could be addressed in Code provisions. The FRC

intends to consult on amendments to the Code this Autumn, so there will be

opportunities to consider these ideas further in that context.

4.18 The idea that companies should be required to provide more information and

metrics about productivity as part of the Strategic Report has been addressed in the

Investment Association’s Long-Term Reporting Guidance published in May which

includes calls on companies to report on the main drivers of productivity within the

business and the process by which productivity is assessed. The Government

endorses this industry initiative and has asked the FRC to consider whether to

Government response: Corporate Governance Reform

amend its guidance on the Strategic Report to provide further encouragement for

companies to report on the steps they are taking to measure and improve

productivity as an aspect of promoting the success of the company in the long term.

4.19 Most relevant in the context of the green paper were the comments and, in some

cases, concerns about whether the FRC has the powers, resources and status to

undertake its functions effectively. These are important issues since the FRC plays

such a central role in the UK’s corporate governance framework. Particularly

important are concerns that, whilst the FRC has the ability to enforce the accuracy

and integrity of financial statements, its ability to test and challenge the quality and

integrity of companies’ corporate governance reporting is limited. The FRC itself

has asked for increased powers, both to monitor and enforce corporate governance

reporting and to sanction directors who are not members of professional

accountancy bodies.

Action 12

In the short term, the FRC, the Financial Conduct Authority and the Insolvency

Service have been asked to conclude new or, in some cases, revised letters of

understanding with each other before the end of this year to ensure the most

effective use of existing powers to sanction misbehaving directors and ensure

the integrity of corporate governance reporting.

The Government recognises the importance of ensuring that the FRC can carry

out these aspects of its supervisory role effectively, in cooperation with other

regulatory bodies as necessary, and will give further consideration to whether the

FRC has the appropriate powers, resources and status to operate effectively.

Government response: Corporate Governance Reform

5. Boardroom diversity

This section addresses the issue of boardroom diversity. It sets out

the steps that the Government and industry are taking to improve

gender and ethnic diversity and responds to recommendations

made by the BEIS Committee.

Summary of responses

5.1 The green paper did not directly seek views on boardroom diversity but the issue

was one that was raised in the course of the consultation. Many respondents

highlighted the strong business case for greater diversity in the boardroom, and

drew links between this agenda and corporate governance reform more broadly.

5.2 The BEIS Committee also made a number of recommendations to improve

boardroom diversity in its Corporate Governance report. It recommended, for

example, more ambitious gender targets for FTSE350 companies to meet from

2020 with respect to new appointments to senior and executive management

positions. It also made recommendations for better reporting of diversity issues in

annual reports and for changes to the UK Corporate Governance Code to embed

the promotion of the ethnic diversity of boards.

Action to promote and encourage boardroom diversity

Gender diversity

5.3 The UK has seen a significant increase in the number of women on the boards of

our top companies, driven by a voluntary, business-led approach. In 2010 the

Government appointed Lord Davies to lead an independent review into the lack of

representation of women on FTSE350 boards. He published his first report (Women

on boards) in 2011, setting a target of 25% of board positions to be filled by women.

At that time, only 12.5% of FTSE100 board positions were occupied by female

directors. He published his final report in October 2015, showing that the FTSE100

had exceeded that target; the proportion of female directors had doubled in just four

years. In his final report he recommended increasing the target to 33% by 2020, to

apply to all FTSE350 companies.

5.4 Since the final Davies report, progress has continued to be made. There are now

only six all-male boards across the FTSE350, down from 152 in 2011. This shows

that the voluntary, business-led approach is working and is the right approach.

Government response: Corporate Governance Reform

5.5 As recommended in Lord Davies’ final report, in 2016 the Government

commissioned a new review, this time focused on increasing the numbers of senior

women not just in the boardroom, but throughout the executive levels of FTSE350

companies. Sir Philip Hampton and Dame Helen Alexander have been leading this

review, and published their first report (FTSE women leaders) in November 2016.

They set a new voluntary 33% target for senior executive positions in FTSE100

companies, and set a 33% target for women on boards in the FTSE350 as

recommended by Lord Davies

5.6 As well as supporting and endorsing the work of these reviews, the Government is

undertaking a broad range of activity to help achieve greater gender diversity at

senior levels. For example, the Department for Business, Energy and Industrial

Strategy, in conjunction with UK Government Investments, is actively supporting the

Future Boards Scheme, which is a business-led initiative to help talented, senior

women get board-level development opportunities and gain the experience they

need to apply successfully for board positions.

5.7 The Government also continues to work with the Women’s Business Council, which

has done excellent work with business to maximise women’s economic contribution.

This has included supporting women to set up businesses and encouraging senior

men to drive cultural change in the workplace.

5.8 In addition, reporting requirements have been introduced through the Companies

Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. These require

all quoted companies to include, as part of their strategic report, a breakdown

showing: the number of persons of each sex who were directors of the company;

the number of persons of each sex who were senior managers of the company; and

the number of persons of each sex who were employees of the company. Greater

transparency will help shareholders and other stakeholders hold companies to

account for the progress they are making.

Ethnic diversity

5.9 The Government is also taking steps to support ethnic diversity. It is supporting the

business-led review chaired by Sir John Parker, which published draft

recommendations in November 2016 proposing that each FTSE100 board should

have at least one director of colour by 2021 and by 2024 for the FTSE250. We look

forward to his final report later this year.

5.10 In addition, the Government commissioned Baroness Ruby McGregor-Smith to

examine the obstacles faced by businesses in developing BME talent from

Government response: Corporate Governance Reform

recruitment through to the executive level. She published her findings with

recommendations in February. The Government has published a response

, and

has been working with Business in the Community in supporting companies to

make their workplaces more inclusive to people of all ethnic backgrounds.

Business Diversity and Inclusion Group

5.11 Reports on different aspects of diversity in business have now been published by

Lord Davies, Sir Philip Hampton and Dame Helen Alexander, by Sir John Parker

and by Baroness Ruby McGregor Smith. Recognising a need to bring the various

recommendations together into a coherent message and join up further action,

Margot James MP, Parliamentary Under-Secretary of State for Small Business,

Consumers and Corporate Responsibility, has recently established a Business

Diversity and Inclusion Group. This is intended to bring together business leaders

and organisations to provide strategic leadership on diversity and inclusion issues,

monitor progress in tackling barriers and deliver a clear and coherent message to

the business community on what needs to be done.

5.12 The board will be chaired by Margot James with an initial membership that includes

Anne Milton (the Minister for Women with overall responsibility for policy on gender

equality), the Chairs of the diversity Reviews - Baroness McGregor-Smith, Sir Philip

Hampton, Sir John Parker - as well as Jayne Anne Ghadia, the Government’s

champion for women in finance. It will also include senior representation from

organisations such as the CBI, Institute of Directors, Business in the Community,

FRC and the Equality and Human Rights Commission, all of whom are active in

promoting inclusive workplaces or have a role in delivering greater transparency on

progress. The first meeting of the Group will be scheduled shortly.

The Government response to the BEIS Committee’s diversity recommendations

5.13 The Government shares the BEIS Committee’s wish to seeing greater gender,

ethnic and social diversity on company boards. There are strong economic as well

as social reasons why this is important. Improving the diversity of boardrooms so

that their composition better reflects the demographics of employees, customers

and the communities within which companies operate can help improve decision-

making. It also ensures that boards have access to a wide range of social

perspectives, talent and experience.

5.14 Section 2 of this response sets out the importance of company boards engaging

effectively with their employees and other key corporate stakeholders. Appointing a

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/594365/race-in-workplace-

mcgregor-smith-review-response.pdf

Government response: Corporate Governance Reform

director from the workforce may well contribute to this diversity but there are other

approaches too. The Government agrees with the Committee, for example, that

companies should be doing more to ensure that they are recruiting directors from

the widest possible pool of potentially qualified candidates. The Government

believes that greater diversity within the boardroom can help companies connect

with their workforces, supply chains, customers and shareholders.

Company reporting on diversity issues

5.15 The Government has noted the Committee’s recommendations for further company

reporting on diversity issues, including more reporting on the steps that companies

are taking to enhance the diversity of their executive pipeline. As mentioned in

paragraph 5.8, there is already an obligation for quoted companies to report on the

gender breakdown of boards and senior managers and in the company as a whole.

The Government will continue to work closely with the FRC and others to ensure

that diversity disclosures are effective in helping drive further progress.

Targets for female appointments to senior and executive management positions

5.16 The Committee recommended that the Government should set a target that from

May 2020 at least half of all new appointments to senior and executive

management positions in the FTSE350 and all listed companies should be women.

The Government agrees that more progress needs to be made, but does not agree

that a higher target should be set at this stage. The Davies Review set a target that,

by 2020, 33% of FTSE board members as well as 33% of executive committees

and their direct reports should be women. This will require approximately 40% of

new senior appointments going to women, including in sectors which have a long-

standing male bias in their workforce. This is a stretching but achievable target

which the Government and the Hampton-Alexander Review will monitor closely

over the next three years. The Government’s view is that the immediate focus

should be on delivering what is already a demanding target, rather than setting a

new one.

Publication of workforce data by ethnicity

5.17 The Committee recommended that the Government should legislate to ensure that

all FTSE100 companies should publish their workforce data broken down by

ethnicity and by pay band. The Government has already responded to a similar

recommendation made by Ruby McGregor Smith. It prefers a non-legislative

approach based around setting out the value to business of employing a diverse

workforce and encouraging institutional investors to demand more workforce data.

As set out above, a voluntary approach has delivered significant progress on

women on boards, and the Government intends to take a similar approach in

increasing ethnic representation. The Government will monitor progress and is

ready to act if this voluntary approach does not deliver sufficient progress.

Government response: Corporate Governance Reform

Recommendations for the UK Corporate Governance Code

5.18 Several of the Committee’s recommendations are concerned with potential

amendments and enhancements to the UK Corporate Governance Code and

associated guidance. These are matters for the FRC to consider. Many of them will

be addressed in the consultation on amendments to the Code that the FRC intends

to undertake in the Autumn.

Government response: Corporate Governance Reform

Annex A – List of respondents

Aberdeen Asset Management

Advisory, Conciliation and Arbitration Service (Acas)

Aggreko

All Party Parliamentary Corporate Governance Group

All Party Parliamentary Corporate Responsibility Group

Allen & Overy

Allianz Global Investors

Alternative Investment Management Association (AIMA)

ARC Pensions Law

Arsenal Supporters' Trust

Asesoria

Association of Accounting Technicians (AAT)

Association of British Insurers (ABI)

Association of Chartered Certified Accountants (ACCA)

Association of Convenience Stores (ACS)

Association of Financial Mutuals (AFM)

Association of Investment Companies (AIC)

Association of Member Nominated Trustees (AMNT)

Aviva

B Lab UK

BDO

BHP Billiton

Black Sun

Blackrock

Board Intelligence

British Retail Consortium (BRC)

British Banking Association (BBA)

British Chambers of Commerce (BCC)

British Columbia Investment Management Corporation

British Standards Institution (BSI)

British Venture Capital Association (BVCA)

Building Societies Members Association (BSMA)

Business Services Association (BSA)

Capita Asset Services

Carillion

Cass Business School and Sheffield Institute of Corporate and Commercial Law

Castlefield Investment Partners

Centre for Governance, Leadership and Global Responsibility, Leeds Business

School

Government response: Corporate Governance Reform

Centrica

CFA Society of the UK

Chartered Institute of Management Accountants (CIMA)

Chartered Management Institute

Church Commissioners for England and Church Investors Group

CIPD & High Pay Centre

Citizens Advice

Coalition for Inclusive Capitalism

Communication Workers Union (CWU)

Community Support

Confederation of British Industry (CBI)

Co-Operative Group

Co-operatives UK

CORE Coalition

Council of Institutional Investors (CII)

Crescendo

Crowe Clark Whitehill

DC Thomson

Dechra Pharmaceuticals

Deloitte

Direct Line Group

Directory of Social Change

Durham Company Law Project Steering Group

Easyjet

Ecumenical Council for Corporate Responsibility

EdenTree Investment Management

Edis-Bates Associates

EEF: The Manufacturer's Organisation

Employee Ownership Association

Employment Lawyers Association (ELA)

Engage for Success

Ernst & Young

Federation of Small Business (FSB)

Fidelio Partners

Fidelity International

Financial Reporting Council (FRC)

First Group

FIT Remuneration Consultants

Freshfields Bruckhaus Deringer

Friends Provident Foundation

Galliford Try Services

GC100 and Investor Group

GES International AB

Government response: Corporate Governance Reform

Go-Ahead Group

Governance Institute of Australia

Grant Thornton

Grosvenor Group

Group A firms and Association of Practising Accountants (APA) firms

Hampton-Alexander Review

Hansa Capital Partners

Hargreaves Lansdown

Henley Business School

Herbert Smith Freehills

Hermes Investment Management

House of Commons Work and Pensions Committee

Howdens Joinery Group

HSBC

IG Group

IHG Intercontinental Hotel Group

Insight Investment

Institute for Employment Studies

Institute for Family Business (IFB)

Institute of Business Ethics

Institute of Chartered Secretaries and Administrators (ICSA): The Governance

Institute

Institute of Chartered Secretaries and Administrators (ICSA) Registrars Group

Institute of Directors (IoD)

Institute of Environmental Management and Assessment (IEMA)

Institute of Risk Management

Institution of Occupational Safety and Health (IOSH)

International Corporate Governance Network (ICGN)

International Integrated Reporting Council

International Underwriting Association (IUA)

Investec Asset Management

Involvement and Participation Association (IPA)

J Sainsbury

Jardine Lloyd Thompson Group

Jetram Partnership

Jupiter Asset Management

Just Eat

Kier Group

Kingfisher

Korn Ferry

KPMG

Land Securities

Legal & General

Legislative & Parliamentary Committee of the Association of Pensions Lawyers

Government response: Corporate Governance Reform

Local Authority Pension Fund Forum

Local Pensions Partnership

London Stock Exchange Group

LSE Department of Management

Mace

Manchester United Supporters Trust

Manifest Information Services

Marks and Spencer

Marshalls

Maturity Institute

Mazars

Meggitt

Mercer

MM&K

Moore Stephens

MSCI ESG Research

National Employment Savings Trust (NEST)

National Grid

Nationwide Building Society

Nestor Advisors

New Bridge Street

NGA Human Resources

Northern Ireland Local Government Officers' Superannuation Committee

Odgers Berndtson

Oxfam

Partism Foundation

Pay Compare

Pension Investment Association of Canada (PIAC)

Pensions & Lifetime Savings Association (PLSA)

People Innovation

PIRC

PricewaterhouseCoopers (PwC)

Principles for Responsible Investment (PRI)

Prism Cosec

Proshare

Prospect

PRS for Music

Prudential

Purposeful Company

Radix

Recruitment & Employment Confederation (REC)

Relational Research

Relationship Capital Strategies

Government response: Corporate Governance Reform

Renishaw

Royal Bank of Scotland (RBS)

Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA)

RPMI Railpen

Sage Group

Sarasin & Partners

Schroders Investmnt Management

Senior

Serco

Severn Trent

Share Plan Lawyers Group

ShareAction

ShareSoc

Shift Project

Shire

Siemens

SIFA Strategy

SJD Associates

Social Enterprise UK

Society for the Environment

Society of Motor Manufacturers & Traders (SMMT)

Sports Direct

Squire Patton Boggs

St James Place

St Paul's Institute

Standard Chartered

Standard Life and Standard Life Investments

State Street Global Advisors

Tate & Lyle

The B Team

The City of London Law Society

The City UK

The Doughty Centre, Cranfield School of Management

The Equality Trust

The Hundred Group

The Institute of Chartered Accountants in England and Wales (ICAEW)

The Institute of Chartered Accountants of Scotland (ICAS)

The Institute of Customer Service

The Investment Association

The Investor Forum

The Law Society of England and Wales

The Liberal Democrats

The Quoted Companies Alliance

Government response: Corporate Governance Reform

The Royal Society for the Prevention of Accidents (RoSPA)

The Society for the Environment

The Society of Pension Professionals

The State Board of Administration of Florida

The Transparency Task Force

Thomas Cook Group UK

TLT

Tomorrow's Company

Trades Union Congress (TUC)

Traidcraft

Transport Salaried Staffs' Association (TSSA)

TSB

U.S. Chamber of Commerce - Center for Capital Markets Competitiveness

UK Crowdfunding Association (UKCFA)

UK Shareholders Association (UKSA)

UK Sustainable Investment and Finance Association (UKSIF)

UNICEF UK

UNITE

United Utilities Group

USS Investment Mangement

Virgin Money

W&R Barnett

W8 Remuneration Services

Wealth Management Association (WMA)

Which?

Wildlife and Countryside Link

William Grant & Sons Holdings

Willis Tower Watson

Wise Group

Wittington Investments

YBS Share Plans

The remaining responses were from individuals (including individual academics).

Government response: Corporate Governance Reform

Annex B – Numerical analysis of responses to green paper

questions by respondent type

Business representative

bodies

Individuals

Investors (institutional and

retail investor groups)

Listed companies

Privately-held businesses

Professional advisers –

accountancy, law, others

Professional associations -

ICAEW, ICSA etc.

Think-tanks and academic

responses

Trade unions and wider

society bodies

Other

Total

Response rate

Overall consultation responses

113

375

n/a

Breakdown of responses to key questions

Chapter 1 – Executive pay

Do shareholders need stronger

powers to improve their ability to

hold companies to account on

executive pay and performance?

Yes

124

61%

(227/375)

103

Does more need to be done to

encourage institutional and retail

investors to make full use of their

existing and any new voting powers

Yes

126

46%

(172/375)

Government response: Corporate Governance Reform

on pay?

Do steps need to be taken to

improve the effectiveness of

remuneration committees, and their

advisers?

Yes

160

55%

(205/375)

Should a new pay ratio reporting

requirement be introduced?

Yes

102

51%

(190/375)

Should the existing, qualified

requirements to disclose the

performance targets that trigger

annual bonus payments be

strengthened?

Yes

41%

(153/375)

Could long-term incentive plans be

better aligned with the long-term

interests of quoted companies and

shareholders?

Yes

122

40%

(149/375)

Chapter 2 – Stakeholder voices

Should the stakeholder voice be

strengthened at board level?

Yes

210

65%

(243/375)

Should this be taken forward via:

a) A legislative approach?

Yes

53%

(197/375)

119

Government response: Corporate Governance Reform

b) A code-based approach?

Yes

107

38%

(143/375)

c) Voluntary measures?

Yes

39%

(147/375)

Chapter 3 – Large private companies

Is there a case for strengthening the

corporate governance framework for

the UK’s largest, privately-held

businesses?

Yes

164

51%

(192/375)

Should non-financial reporting

requirements in the future be

applied on the basis of a size

threshold rather than based on the

legal form of a business?

Yes

27%

(100/375)

Chapter 4 – Other issues

Is the current corporate governance

framework in the UK providing the

right combination of high standards

and low burdens?

Yes

37%

(137/375)

For the purpose of this table, the “individuals” category includes responses from a number of individuals with business backgrounds. For example,

responses that were received from business addresses, or from individuals who are directors in small companies, have been treated as individual responses

unless the submission gave a clear indication that the views contained were company views rather than views held by the individual.

Includes responses submitted by academic institutions and individual academics and experts on corporate governance and law.

Government response: Corporate Governance Reform

Due to the wide scope of the green paper many respondents focused on answering questions that were most relevant to them. The “response rate”

shows how many respondents offered views on this specific question.

Excludes “did not comment”. For an indication of the number and share of respondents that commented on this question, please see the provided

“response rate”.

The green paper did not ask this question in these terms, but focused on how the stakeholder voice could be strengthened, testing different policy

options. Judgement has been applied in the analysis of responses to provide this breakdown.

Department for Business, Energy & Industrial Strategy