All large and very large private companies and unlicensed plcs will have to start preparing for the new corporate governance reporting requirements due to receive parliamentary approval. The new regulations will strengthen the UK's international reputation for having a robust corporate governance framework, which makes the UK an attractive prospect with regard to investment and also makes it a good place to do business.
The journey to bolster the current corporate governance regulations began in November 2016 with the publication of a Green Paper, particularly aimed private companies, on corporate governance reform arising from concerns from the public about the high levels of executive pay and the apparent disconnect between performance and remuneration. It was also evident that there was disquiet in connection with the perceived remoteness of the boards of such companies and the lack of representation of employees.
The Government set out a raft of reforms following receipt of 375 written responses to the Green Paper coming from businesses, professional and trade organisations and the general wider society. The Business, Energy and Industrial Strategy (BEIS) committee had also reported on corporate governance, the data and conclusions from the committee's findings were added to the information being reviewed.
The new regulations will oblige companies to explain in their annual reports how their directors have complied with the requirements of Section 172 of the Companies Act, which requires companies to have regard for their employees' interests as well as those of their customers and suppliers. The objective is to make the directors of companies to think more thoroughly about how they are dealing with these matters and the more comprehensive information will enable shareholders to hold the directors to account. The very large private companies will have to make a statement about their corporate governance arrangements and whether they are intending to comply with the Wates corporate governance principles. They will have to disclose their governance arrangements on their websites and in their directors' report. Should they feel that there is a justification for not complying with any part of the code their reasons must also be explained.
Quoted companies whose head count exceeds 250 UK employees will have to publish pay ratios comparing the CEO's remuneration to the median employee pay at the 25th and at the 75th quartiles. Furthermore the ratios will need to have an accompanying rationale explaining the reasons for any changes to the ratio in the coming years, including whether the median pay ratio remains consistent in relations to reward and progression policies for the UK employees as a whole. This is to assist shareholders assess the new information and make a judgement as to whether the senior executives pay is justified and consistent with the arrangements for the rest of the workforce.
The final piece of new information that large, very large and quoted companies will have to provide is an illustrative report on the impact that future share price growth will have on share-based incentive plans. This is to provide shareholders with a better understanding of the significance of the share price growth in relation to the increase of executive pay, which in turn will encourage remuneration committees to shy away from automated pay outcomes linked to share price growth.
The estimated business costs for providing all the additional information is predicted to be in the region of £16.7 million initially in year one and an on-going cost of £9.8 million annually thereafter. The new reporting obligations will shore-up and reinforce the existing regulations. The time frame for the reforms is as follows: the Wates consultation ends in September 2018, with publication on its findings at the end of December 2018 and January 2019 will see the new reporting obligations apply for all future financial years from that date with the first compliant reports seen in 2020. Boards will have to make provision using one of three methods for gathering the workforce and wider stakeholders' point of view, either by a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director.
All companies caught by the new regulations would be well advised to lay their plans for compliance at the earliest possible stage in order to be well equipped for the changes.
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