The Green Paper on Corporate Governance Reform is not a Christmas Hit but Contains Some Crackers

The Government seems to have responded to the collapse of BHS and the exposure of poor working practices at Sports Direct by issuing a consultation paper on a range of measures designed to ensure that business behaviours are less egregious and more accountable. Corporates are not known for their love of Governmental interference but post 2008, this is something that increasingly they have to get used to. Recently, larger companies, or those with a high turnover, have had to handle a raft of new requirements including reporting on Modern Slavery and companies with over 250 employees are now preparing for the implementation of the new Gender Pay Regulations in 2017.

For HR professionals, there are a few big issues in the Green Paper. A key theme is that the Government wants to tackle the perceived disconnect between executive pay and company performance within quoted companies. To tackle this, the Government suggests that a company’s remuneration committee could consult both shareholders and the wider company workforce in advance of preparing its pay policy, allowing for a broader range of views to be heard. The idea of the ‘wider workforce’ being consulted on executive pay may not fill company board members with joy but might it result in greater workforce engagement?

The most controversial proposal is whether companies should publish ratios comparing CEO pay, to pay in the wider company workforce (rather than just the median company pay as at present) enabling comparisons between companies, sectors and whether the pay ratio has changed over time and allowing shareholders to decide whether pay levels are proportionate given the company’s performance. Would such a move really provide any meaningful, measurable data? It’s unclear. It’s also worth bearing in mind that this proposal only applies to listed companies and will not apply to the majority of companies at all.

The Government still thinks that there’s too much short-term thinking within big companies and it wants to remedy this, so Long Term Incentive Plans (LTIPs) have also come under fire. The Government’s first idea is that LTIPs are often too complex to be transparent to investors and wonders whether ‘restricted share’ awards should be awarded instead. Its second idea is that minimum holding periods for share options should be extended from 3 to 5 years. In a world of ‘golden handshakes’ in which employers routinely compensate new employees for the options they lost when they moved to join the company, it’s debatable what impact this change would have. The Green Paper also suggests that bonus targets could be subject to disclosure although it acknowledges the commercial confidentiality issues this would give rise to.

Given the backlash from business, it is unsurprising that the Government has completely rowed-back on its suggestion that large UK companies should be required to have an employee representative on their board. However, they have put forward a quite a piecemeal array of alternatives, including that an existing non-executive director should be designated to ensure that the voices of ‘key interested groups’ including employees are heard at board level. Would boards listen? Would this help hold over-confident businesses to account or would this be a tick box exercise?

Even if any of these measures are implemented, it’s unclear what mechanism the Government would choose: they’ve given the option of the proposals being introduced by way of legislation, a mandatory 'comply or explain' code or on an entirely voluntary basis. The Green Paper fails to mention what would happen if a company ignored its obligations, raising the question of whether the planned changes have any teeth at all. Given the current trend to 'name and shame' this is a possible option though.

Although there will rightly be plenty of concern throughout boardrooms across the UK about this Green Paper, in the long run, could consulting about executive pay and encouraging transparency be positive for a company’s reputation?

While there’s a chance that making changes to the corporate environment could help companies become an employer of choice for today's more ethically minded employees entering the workforce for the first time, we doubt any of the proposals would have prevented the debacles at BHS or Sports Direct and so may be seen as largely window dressing as opposed to driving fundamental change.

This post comes to us from Clyde & Co LLP and has been co-authored by Nick Elwell-Sutton and Charlotte Stern.