Revised U.K. governance code gives workers more of a voice

The United Kingdom’s corporate governance regulator on Monday announced a series of changes to improve public trust in large companies following criticism that boards are still too interested in fat-cat pay deals and short-term goals, and investors are too sleepy or timid to exert proper influence.

From January next year, U.K.-listed companies will have a requirement for the first time to engage with workers by appointing a director from the workforce, setting up a workforce advisory panel, or designating a non-executive director to take account of employee concerns regarding the running of the company and its future.

Companies will also need to report on how they will appease investors whenever a shareholder resolution results in a dissenting vote of 20 percent or more.

The revised code, which retains its “comply or explain” approach, focuses on corporate culture and says that boards should create a culture that aligns company values with long-term strategy.

The Financial Reporting Council (FRC) wants greater focus and discussion on boardroom diversity and succession planning, and from next year companies will need to justify why a company chair should stay on in the role after nine years.

Other changes are centred largely on executive pay. Senior executives will be banned from selling shares awards for five years, rather than the current three years—a reaction to Carillion’s board dumping shares ahead of the company going bust—while remuneration committees will have more discretion to adjust pay outcomes when they do not reflect wider performance.

The committees will need to describe in the remuneration report (with examples) how they consider factors such as clarity, simplicity, risk, predictability, proportionality, and alignment to culture when setting executive pay. The report should also disclose pay ratios and pay gaps and describe whether and why discretion was applied to pay outcomes.

“The government should have stuck to its commitment to make workers on boards mandatory.”

Frances O’Grady, General Secretary, Trades Union Congress

Chairs of remuneration committees will only be able to accept the role if they have had 12 months previous experience.

The code also reiterates the need for investors to provide effective challenge to poor boardroom practices and pay policies, saying that they must “engage constructively and discuss with the company any departures from recommended practice.”

The FRC says that the revised code is shorter and sharper because it has fewer detailed provisions. It has also removed the “supporting principles” that are present in the current version of the code and were added to provide more clarity (but which critics said did the opposite).

The revisions have been largely welcomed by business groups. The Confederation of British Industry (CBI) calls the guidance around employee engagement “helpful” and says that clarification around the tenure of company chairman is “welcome.”

The Institute of Directors (IoD) also welcomes the revised code, but adds that it is “disappointed” that a crucial recommendation for directors to undertake continued professional development has been demoted to the accompanying guidance rather than included in the code itself.

“Recent corporate failures have shown the danger of company boards not being aware of their responsibilities and duties, and as the primary governance document for many U.K. companies, the Code should be playing a key role in raising the standards of U.K. directors,” says the IoD’s head of corporate governance, Dr. Roger Barker.

Other critics have pointed out that the changes do not go far enough. On her campaign trail to become Prime Minister following David Cameron’s resignation in 2016, Theresa May had pressed for workers to be on boards. This was subsequently watered down to “boardroom representation” and has been diluted further so that companies now just have regard to employee concerns.

“The government should have stuck to its commitment to make workers on boards mandatory,” says Frances O’Grady, general secretary of the U.K.’s Trades Union Congress.

Environmental law campaign-group ClientEarth says that the revised code is a “missed opportunity” because “it has failed to take sufficient steps to address climate risk as one of the leading concerns of shareholders.”

“We are disappointed the FRC has not integrated the Task Force on Climate-related Financial Disclosures (TCFD) recommendations more fully in the corporate governance and reporting framework,” says ClientEarth lawyer Dave Cooke.

The TCFD recommendations are meant to encourage companies to provide more meaningful disclosures on how climate change-related risks may impact their business, and have been pushed by the world’s most developed countries as a best practice benchmark for better corporate reporting. Around two thirds of G20 member states have engaged with the framework since its launch in June last year.

Cooke adds: “The minimal reference to the TCFD recommendations appears in the section of the FRC guidance on relations with stakeholders. This completely misses the point that the TCFD recommendations focus on the financial implications to the business from climate change and consequently fails to recognise the central importance of climate risk information for shareholders.”