Brexit: UK Government Corporate Governance Reforms

The Brexit referendum has led the UK Government to reform corporate governance, in an effort to assure the UK’s leading position as offering the best possible conditions in which companies may operate. The government plans to bring legislation before Parliament by March 2018, and for it to go into effect in June 2018. These reforms target director evaluation, worker representation on boards, executive pay and private company adherence to the Corporate Governance Code.

Brexit Corporate Governance Reform Timetable

  • 29 November 2016 – Department for Business, Energy & Industrial Strategy – Green Paper published
  • 5 April 2017 – House of Commons Business, Energy & Industrial Strategy Committee – paper on corporate governance
  • 29 November 2016 to 17 February 2017 – Department for Business, Energy & Industrial Strategy – Consultation on Corporate Governance Reform
  • 29 August 2017 – Government publishes response to the consultation
  • Late Autumn – Financial Reporting Council will consult on amendments to the Corporate Governance Code
  • March 2018 – Government intends to present before Parliament draft secondary legislation
  • June 2018 – Government plans to bring reforms into effect

With the UK preparing to leave the European Union, as a consequence of the 23 June 2016 referendum that voted the move, government and business agree that the country’s corporate governance measures must be strengthened.

There is real concern in both British government and business that Brexit will weaken the UK’s leading positon as offering the best possible conditions in which companies may operate.

Stephen Haddrill, CEO of the UK Financial Reporting Council (FRC), which is responsible for the official Corporate Governance Code, said: “The UK’s deserved reputation for good corporate governance, earned over the last 25 years, has underpinned British business success. How we develop the framework will be key to boosting competiveness, transparency and integrity in business particularly after Brexit. Successful and sustainable business are not just good for the economy, they support wider society by providing jobs and helping to create prosperity.”

The Government plans to bring a draft bill of legislation before the UK Parliament by March 2018; the pressure is on because the Article 50 exit clause of the EU treaty gives the UK and the EU only until the end of March 2019 to reach an agreement on Brexit terms and conditions. By then, the direction of UK corporate governance policy must be clear.

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There has been some lack of clarity, because the tough position taken by Prime Minister Theresa May has been eased, to some extent.

“The decision of the British people on 23rd June [Brexit referendum] gives us a once-in-a-generation chance to shape a new future for our nation: the chance to build a stronger, fairer country,” May insisted, in a speech on corporate governance on 21 November 2016.

May said she sought to establish “the best corporate governance of any major economy,” and, to achieve this, would address three major issues: executive pay, accountability to shareholders, and proposals to ensure the voice of employees is heard in the boardroom. Yet the final proposals “did not match the initial radicalism of May’s vision.”

The government’s reply to the consultation on 29 August advanced these proposals, with the following guidelines:

  • Companies must publish a ratio reporting the difference between CEO pay and that of the average UK employee, along with a narrative putting that ratio into context;
  • Remunerations committee will take a broader responsibility for pay within the group and actively explain differentials on quantum and format of remuneration for executive directors and employees as a whole;
  • Companies to set out steps that they will take when they encounter opposition to executive pay increases;
  • FRC will have more powers to pursue directors with reference to Section 172 in their strategic reports, filed with the latest annual accounts to Companies House, on risks and nonfinancial data.
  • UK private company adherence to the Corporate Governance Code.
  • Workers are meant to gain more of a voice in the boardroom via one of three mechanisms: appointing a non-executive director to represent employees, creating a workers’ advisory council or nominating a director from among the employees.

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May had initially advocated a system like that in Germany with a kind of workers’ council representation at the board level, but this was strongly opposed by business. Yet much of the initial Government vision of corporate governance reform has made its way into these proposals, according to Simon Osborne, Chief Executive of the UK Institute for Chartered Secretaries and Administrators.

On executive pay, the Government had initially planned an obligatory annual vote by shareholders to either support or protest the board’s decisions. This has been removed from the current proposals. Nonetheless, total executive remuneration will be compared with that of the lowest-paid workers, and a narrative will be included to justify pay rises from the previous year.

If shareholders oppose executive pay rises in large numbers, the board must explain what resulting actions it has taken or plans to take.

Directors’ actions will also receive closer scrutiny by the FRC, to ensure the most effective use of existing powers to sanction misbehaving directors and ensure the integrity of corporate governance reporting.

And the largest of unlisted private businesses will now have to report on compliance with the Corporate Governance Code. 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 of equivalent scale.

The Government took the view that SMEs should not be forced to show Code compliance. But the FRC will be tasked 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.

We have seen that the Government plans to bring all of its reforms into effect by June 2018. This means that considerations by the FRC, the Confederation of British Industry and other organisations involved must take place on a strict schedule.

But Brexit has made it essential that rapid changes assure the UK’s place as a leader in business and as a target for direct investment.

Says Oxford corporate governance expert Colin Mayer: “The marked changes in the composition of the UK economy that are in prospect as a consequence of Brexit will require company law and corporate governance systems that are sufficiently enabling and flexible to respond appropriately to the changing circumstances and needs of companies.”

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