On 22 September 2017, BEIS published the Government's response to its report on the inquiry into corporate governance. We discussed the BEIS Committee Report on corporate governance in G&SL April 2017 edition.

In relation to promoting good corporate governance, the Government:

  • supports the recommendation that the FRC should amend the UKCGC to require informative narrative reporting on the fulfilment of section 172 duties. The Government plans to introduce secondary legislation to require all companies of a significant size (private and public) to explain how their directors have had regard to the employee and other non-shareholder interests set out in section 172. A draft statutory instrument will be published later this year;
  • is concerned that a formal annual rating exercise risks undermining the valuable and legitimate flexibility of the UK's "comply or explain" approach to corporate governance;
  • recognises that the FRC plays a central role in the UK corporate governance framework; however, it does not currently propose to give the FRC additional powers to engage and hold directors to account in respect of their duties; and
  • supports the further development of the role of the "Investor Forum".

In relation to private companies, the Government:

  • supports the recommendation that the FRC, Institute of Directors and Institute for Family Business should develop, with private equity and venture capital interests, a voluntary set of corporate governance principles with which the largest privately-held companies would be expected to comply; and
  • does not envisage making compliance with a Code (or set of principles) mandatory and considers that large private companies should continue to be able to adopt the arrangements that suit them best. The Government does not propose to introduce a formal complaints mechanism.

In relation to executive pay, the Government:

  • believes that companies should continue to exercise flexibility when deciding the long-term share remuneration policies and models that they put to investors for approval; however, the Government also considers that companies and shareholders should be open to alternatives to the LTIP model which currently dominates; and
  • supports the idea of pay ratio reporting which will compare CEO remuneration to average pay in the wider company workforce. The Government intends to introduce secondary legislation to implement this.

In relation to the composition of boards, the Government:

  • believes that the Government should remain focused on the current target of 33% of FTSE 350 board members as well as 33% of Executive Committees and their direct reports in the FTSE 100 should be women by 2020. The Government does not therefore propose to implement a new target that, from May 2020, at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women; and
  • does not intend to give the FRC an additional role of overseeing the rigour of the board evaluation process by the external facilitator.

The full report can be accessed here:

https://publications.parliament.uk/pa/cm201719/cmselect/cmbeis/338/338.pdf

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