Blog : BOARD TALK
|Posted on November 7, 2016 at 9:45 AM|
Quietly, amid other events grabbing the headlines, there have been some interesting developments in UK corporate governance, by way of input to the government's BEIS Select Committee inquiry into corporate governance.
Both the independent regulator, the Financial Reporting Council (FRC) and Britain's biggest business group, the CBI, have made recommendations on employee representation and executive remuneration that show a change in thinking.
In its response to the BEIS Select Committee inquiry, the CBI said companies should be required publicly to explain what steps they have taken to seek employee representation.
The UK Government should consider introducing a new ‘comply or explain’ requirement for businesses to assess the best route to improving employee representation, and introduce a binding vote on executive pay for companies that continually fail to satisfy shareholders with remuneration decisions, it said.
These options could include placing an employee on the board, appointing a non-executive director with responsibility for representing staff views, or having an employee consultation committee. (In other words, a boardroom structure to suit an aim, rather than a dismissal of the aim because it does not fit into an existing structure).
If employees do sit on company boards, it is critical that they have the same responsibilities and duties as all directors in order to maintain the unitary board model, said the CBI. (my emphasis)
Meanwhile, the FRC's response to the inquiry talks about the importance of taking wider stakeholders into account in the boardroom.
Boards should pay more attention to their responsibilities under Section 172 of the Companies Act 2006 to both shareholders and wider stakeholders and should report on how they have discharged these, it said. Interestingly, "For example, by showing how they have allocated funds between pensions, dividends, directors’ remuneration, and capital investment."(my emphasis).
Note the important appearance of 'pensions' in the mix.
The FRC recommends the scope of Remuneration Committees’ responsibilities could be widened to explain the link between remuneration and strategy. It should have a wider responsibility for scrutinising the pay and conditions of the company’s workforce as a whole, it suggests.
On executive pay, the CBI has called for new proposals to focus on tackling what it calls "those few firms that persist in making payments that shareholders regard as excessive or out of step with company performance."
The CBI is calling for an escalation mechanism for companies where this has been the case. Based on the principles adopted in the Australia ‘two strikes’ system, shareholders would have the ability to issue ‘one strike’ through the advisory vote with a ‘second strike’ being a binding vote.
This recommendation, it said, would strengthen the 2013 reforms to the Directors’ Remuneration Regulations and would work with the current corporate governance system.
Interesting times - the issue of employee representation in the boardroom should not be dismissed as a quirky idea. As is clear from the CBI and the FRC's responses to the inquiry, it is inextricably linked to the question of what businesses are there for, and the battle to regain public trust.