In a speech at the CBI annual conference 2016 on 21 November, the Prime Minister, Theresa May, set out the Government’s vision for UK businesses including corporate governance reform. She confirmed that a green paper on corporate governance will be published later in the year that will address executive pay and accountability to shareholders.
This green paper will also look at proposals around ensuring the employee voice is heard by the Board. Statements made by the Prime Minister earlier in the year had suggested that the Government was considering proposals for companies to have employee directors on the board, however, in her speech to the CBI, the Prime Minister stated “categorically” that “this is not about mandating works councils, or the direct appointment of workers or trade union representatives on boards”. She indicated that some reform can be achieved by voluntary improvements in practice but stated that where voluntary plans do not go far enough, the Government is prepared to go further.
The UK’s strong reputation for good corporate governance
The Prime Minister acknowledged that the UK already has a strong reputation for corporate governance but highlighted that:
“…We can’t stand still – we must continue to make improvements where these result in better companies and improved confidence in business on the part of investors and the public.
Much can be done by voluntary improvements in practice – in the representation of women on company Boards and in senior positions for example, or in broadening diversity. But where we need to go further we will.”
Employee representation on the Board
Despite overtures during the Conservative leadership contest and even as late as the party’s October conference, the speech confirmed that formal worker representation on Boards will not be compulsory:
“First, while it is important that the voices of workers and consumers should be represented, I can categorically tell you that this is not about mandating works councils, or the direct appointment of workers or trade union representatives on boards.
Some companies may find that these models work best for them – but there are other routes that use existing board structures, complemented or supplemented by advisory councils or panels, to ensure all those with a stake in the company are properly represented. It will be a question of finding the model that works.”
(See Caroline Pearce’s blog for an overview of some approaches a company can take to increase the employee voice within a governance structure.)
Board structures in the UK
There will be no move away from the UK’s unitary board system where directors decide company policy by consensus.
“…This is not about creating German-style binary boards which separate the running of the company from the inputs of shareholders, employees, customers or suppliers. Our unitary board system has served us well and will continue to do so.”
The Prime Minister reiterated in her speech the need for both Government and business to change their approach.
“…We all know that in recent years the reputation of business as a whole has been bruised. Trust in business runs at just 35% among those in the lowest income brackets.
The behaviour of a limited few has damaged the reputation of the many. And fair or not, it is clear that something has to change.”
The green paper will propose measures on executive pay. Looking back to speeches made both during the Conservative leadership contest and following her appointment as Prime Minister, these measures could include a binding shareholder vote on pay and reporting and transparency on bonus targets and the ratio between CEO pay and average worker.