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  • Corporate Governance Reform in the UK

    Nov 10, 2017   

    The government of the UK has issued a response document regarding Green Paper consultation on 29 August, 2017. The proposal is specifically published to strengthen the existing architecture of listed and non-listed companies.

    It will be used to bring necessary reforms in corporate governance majorly in three disciplines: corporate governance in private business sector, executive pay scale, and corroborating the three cores of a company employee, customer, and stakeholder.  

    The implementation of these measures might help in the improvement of shareholder scrutiny related to the matter of executive pay scales. This reform is expected to act as a catalyst in bringing confidence in the ways the companies operate. As a result of which the corporate governance system will be prepared for any economical challenges that might come across.

    In this article, we will thoroughly explain the three aspects mentioned above.

    Corporate Governance in Private Business Sector

    The government aims to invite the FRC and Institute of Directors to initiate a voluntary list of corporate governance principles. These principles will help in escalating the development of private companies. Here, an important thing to note is that this code will also work for unlisted companies as well. However, there are no rules mentioned for public companies.

    In addition to that, the government is also going to introduce a secondary legislation that will require all companies to show their corporate governance arrangements on their websites.  

    Executive Pay Scale

    According to the reforms, the government will ask the Financial Reporting Council (FRC) to increase the ‘holding period’ from 3 to five years of shared based remuneration.

    The government also invites the Investment Association to maintain a public register of those companies that encounter at least 20% opposition from share holders.

    Owing to secondary legislation, it will become mandatory for the listed companies to include the ratio of ‘CEO pay to the average pay’ in their to annual report of remuneration.

    Corroborating the Three Cores of a Company

    In this context, the government will ask the companies (public and otherwise) to clarify the reason why their directors must conform to section 172. This might not be the most anticipated reform as many directors are already publishing annual reports regarding this matter. Furthermore, the GC100 group will also be invited to publish new recommendation on the practical implementation of the section 172.

    The government will ask the FRC to consult bolstering the opinions of both employees and stakeholders.

    Moreover, the will further persuade the investment Association to initiate regulation of ways that will enable employees to engage with stakeholders at a bigger level.

    Some of the mentioned above proposals have been welcomed, while most might just fine-tune the governance system rather than bringing significant change. In addition to that, some of the reforms are just ‘invites’ to the state actors to join hands and help in the development. Another thing to remember is that, very little detail has been published uphill now. So, we would have to wait for a comprehensive proposal to make final judgments.