Focus on executive pay and employee voice indicate growing role for the function

The government recently published a green paper asking for views on the future of corporate governance. Prime minister Theresa May’s introduction to the paper refers to a loss of public faith in business – perhaps unsurprising in light of the scandals at BHS and Sports Direct. As well as responding to public pressure, the government intends its proposals to benefit the economy and improve the conditions for long-term investment. However, as with most reform, this is likely to mean more work for those involved in managing organisations.

The paper focuses on three main areas for change: shareholder influence on executive pay; giving a greater voice to employees and consumers in the boardroom; and whether corporate governance rules for listed companies should be extended to large private companies.

Executive pay has risen steeply in comparison to average pay in the workforce and tends to outpace organisational performance. It is possible that new reporting obligations (similar to modern slavery or gender pay gap reporting) will require companies to disclose the pay ratio between executive pay and the workforce, or the performance targets that trigger executive bonus payments. Another proposal is to make executive pay subject to an annual shareholder vote.

May has already ruled out electing workers or trade union representatives on executive boards. However, the paper explores the option of establishing advisory panels to sit alongside and supervise executive boards, comparable to the system already in place in Germany. Other options include: appointing non-executive directors to take responsibility for putting forward employee or other non-shareholder perspectives; and asking organisations to report on how often, and by what mechanism, they consider employee interests.

It seems unlikely from the wording of the paper that the government will dictate how organisations should increase engagement with employees; it is more likely to leave it to them to select the most appropriate mechanisms. Policing and enforcing this aspect of the reform agenda will, therefore, be challenging, whatever the outcome of the consultation.

According to the paper, more than 2,500 private companies have 1,000-plus employees but are not expected to meet the same corporate governance standards as listed businesses. The government is considering extending the UK Corporate Governance Code to those companies, which will involve having appropriate internal controls on risk-taking, more effective use of non-executive directors and higher reporting standards, including an obligation to explain how and why a business has not complied with aspects of the code.

If changes are made in this area, private companies of a similar size and economic significance to public organisations will feel the impact.

In all key areas under discussion, increased reporting obligations may be inevitable. As we have seen with modern slavery and gender pay gap reporting, this has created work at all levels of company management, not least in identifying the function responsible for reporting, identifying the relevant data, and understanding what that information says about the organisation. Then comes the question of how to present this publicly. If the data identifies areas for improvement, strategies need to be developed to address these issues, for which executive buy-in is essential.

Business secretary Greg Clark has already said that it may not be necessary to use regulation where views indicate that change is appropriate, so it’s not clear exactly how the government will react to the responses it receives from the green paper. Options range from formal legislation and codes to voluntary practices.

Responsibility for a new corporate governance regime could lie with executive management, remuneration committees, payroll or the entire HR function, and, at this stage, there are more questions than answers. Responses to the green paper are due in by 17 February 2017 and, while we will not know the outcome until later next year, the direction of travel seems clear.

HR is in a good position to lead the way when it comes to looking at their organisations’ culture and governance, so that, whatever the results of the consultation, their companies will be well-placed to meet their obligations.

Marian Bloodworth is a partner, and Anna Byford a senior associate, in the employment team at Kemp Little LLP

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