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Peter Swatrey FCIS rs por-rcyAND RESEARCH
DIRECTOR AT ICSA: THE GOVERNANCE INSTITUTE
FOR GOVERNANCE professionals, the
UK government's response to a consultation on its
November 2016 green paper on corporate governance
reform is among the key events of this year.
Under proposed reforms, the Department for
Business, Energy and lndustrial Strategy (BEIS) will
join with regulators and industry to address issues
of executive pay; strengthen employee, customer
and supplier voices; and encourage corporate
governance in large, privately-held businesses. Not all
the options discussed in the green paper made the
final cut, prompting accusations in the press that the
government had retreated from its original proposals.
ICSA: The Governance lnstitute supports sound
governance principles and wishes to improve the
standard of governance in the UK. As we said to the
prime minister on 24 lanuary in our joint letter with
the Institute of Directors, the lnternational Corporate
Governance Network (ICGN) and the Trades Union
Congress (TUC): 'There are certainly some areas
where improvement should be actively sought;
others where more time should be given to assess
the effectiveness of legal and regulatory measures
that have already been taken; and still others where
we are not convinced that an adequate case has
been made for change,'
We were among those who responded to the
green paper and have since worked with officials at
BEIS as they develop their thinking. Our view is that
22 October 2017
e*xenpmm€m*
the government proposals have fairly balanced
the desire to see some issues addressed more quickly
with awareness that legal, regulatory and industry
initiatives over the last few years are starting to
have an effect.
Executive pay
We believe that executive pay is sometimes excessive
and that action needs to be taken to address it.
There is a good argument that high pay is not solely
an issue in public companies, who may only account
for a small proportion of the highly-paid in our society.
But this is the issue that the government has chosen
to address and - rightly - it has focused on some of
the gaps in existing legislation.
We previously urged the government to remember
that the changes to executive pay regulation brought
in during 2013 are only just coming into effect and
argued that shareholders do not need stronger
powers over executive pay right now.
ln 20'1 6 there were relatively few companies that
saw shareholder votes against their remuneration
reports, and in 2017 even fewer saw votes against
their remuneration policies. This suggests that
engagement between companies and stakeholders
has been effective, justifying the government,s
decision not to introduce annual binding votes
on remuneration.
in our view, this was unlikely to reduce levels of
executive pay, and could have made it more difficult
for companies to recruit talented individuals, and led
to short-term thinking.

5hareholder dissent
On the other hand, the proposal that companies
should state more clearly what they intend to do
where they receive an adverse shareholder vote is a
good one. We believe there should be consequences
after an adverse vote. However, shareholder dissent
can have many causes, sometimes conflicting.
As such, the requirement should be complemented
by a duty for investors to communicate their explicit
reasons for a negative vote to the company. There is
a vital distinction between situations where investors
no longer consider the policy to be appropriate
and where they are concerned about the subjective
elements of implementation, such as matters of
judgment and discretion.
The proposal that the lnvestment Association
maintain a register of companies receiving adverse
shareholder votes and their proposed actions is also
good, creating a central repository for information
that is already mostly in the public domain.
Remuneration schemes
The requirement for greater clarity in executive
remuneration schemes is also one that ICSA backs.
As discussed above, binding votes provide useful
certainty on remuneration policy, but it is also
important that shareholders fully understand the
policy and its resulting pay structure. Similarly, an
increase in the minimum holding period for share-
based payments is sensible.
However, we are not convinced that holding periods
are generally perceived to be a problem: the concern
mostly seems to be about the size of awards, which
in many cases is driven by a tendency to discount
the value of potential future payments, sometimes
referred to as 'jam tomorrow'. Ensuring executives
have a long-term stake in the company is vital, but
Our view is that remuneration committees do
take into account rrulder stakeholder interests,
and do challenge pay policies
this can be achieved in other ways - for instance, by
setting additional shareholding requirements.
We are also pleased to see that the green paper's
suggestion of a 'senior shareholder committee' has
been shelved. Where this model has been successful,
it has been so under completely different company
law and market structures.
However, the proposal to give the remuneration
committee a broader responsibility for overseeing pay
and incentives across their company is interesting, as
is requiring them to engage with the wider workforce
to explain how executive pay aligns with wider
company pay policy.
Our view is that remuneration committees do take
into account wider stakeholder interests and challenge
pay policies. This is the experience of our members,
who regularly attend remuneration committee
Feature Green paper
meetings. Even so, specific responsibility for reviewing
pay across the company may be useful.
Pay ratio
Finally, there is the introduction of the pay ratio
(this has been discussed in-depth on the Goyernance
and Compliance website and on page 10). This will
be an interesting statistic, providing useful information
for and about a company when judged over a
period of time.
ln our view, there are other metrics which would
be more meaningful and effective if disclosed.
However, the required narrative explaining year-to-year
changes to that ratio and how it relates to pay and
conditions across the wider workforce does somewhat
mitigate our fears.
The ratio should not be used to compare between
companies, and there is a risk the headline ratio
figures will be reported by the media without context,
leading to unfair public criticism for some companies.
Strengthening the employee, customer
and supplier voice
Our members' experience is that boards already
take into account the interests of staff and other
stakeholders.
ln our response to the green paper, we argued
that legislation in this area was unnecessary:
'There will, undoubtedly, be companies for which
[stakeholder advisory panels, a designated non-
executive director or an employee directorl would
work well and they should be free to adopt them.
However, we have concerns about these options
being mandated for all companies.'
We are pleased to see that the government has
heeded this advice. However, it has proposed that
companies should have 'one of three employee
engagement mechanisms [those mentioned above]'
asking the FRC to consult on making this a UK
Corporate Governance Code requirement on a
'comply or explain' basis.
It has also asked the Association of General
Counsel and Company Secretaries working in
FTSE 100 Companies (GC100) to publish new advice
and guidance on the practical interpretation of
the directors' Quties set out in section 172 of the
Companies Act 2006.
Our preferred solution here was for enhanced
reporting on stakeholder engagement, the option
favoured by the government. lt proposes to require
that all public and private companies of a certain
size explain how their directors comply with the
requirements of s172 to consider employee and
other interests.
govcompmag.com 2!
Feature Green paper

This is important - so important, in fact, that
rue have been working on guidance with the
nvestment Association to help companies needing
;upport in this area, and to share existing good
rractice. The government recognised this work by
jirectly asking in the green paper that this guidance
re completed. lt now has been and you can read
nore about it on page 28.
Corpcrate gcvernance in large,
privately*held busi*esses
Vany private companies already comply with much,
f not all, of the UK governance code because
t is simply good business to do so, and some
arger private companies choose to report on their
lovernance voluntarily.
However, the governance of private companies
:ould be better, most notably in terms of transparency.
\s we said in a letter to the prime minister in
\ugust 2016: 'The fact that a large company may
re privately owned does not reduce the public
mpact when it fails. Arguing that there should be
jifferent expectations on the board of directors
;imply because there is a different ownership
;tructure is a red herring.
'The Companies Act 2006 already recognises this
:o be the case, which is why the duties of directors
;et out in Part 10 of the Act - which include a
'equirement to consider the long-term consequences
rf their decisions and the impact on their employees
and the community - apply to directors of all
:ompanies, not only publicly quoted ones.
'The boards of larger private companies should
re expected to aspire to the same standards of
Jovernance as those in the listed sector.'
It should be no surprise that we back the
Sovernment's proposal that all public and
:rivate companies of a given size disclose
:heir corporate governance arrangements
n their directors' report and ontheir ;,
is little evidence that the existing governance model
for private companies does not work for most firms.
It is important any enhanced rules governing private
companies be proportionate to their benefits. We
expect that the thresholds at which a company has
sufficient societal impact to bring it within the scope
of reporting requirements be set at a high level, in
which case it is likely that companies will already
largely be meeting such requirements.
The government has also taken the opportunity to
indicate its intention to proceed in two further areas.
It will ask the FRC, Financial Conduct Authority and
the Insolvency Service to work together to ensure
the most effective use of existing powers to sanction
misbehaving directors, and ensure the integrity of
corporate governance reporting.
Lastly, the government will further consider
the need for additional powers for the FRC,
and plans to commission an examination of the
use of share buybacks to ensure that they cannot
be used artificially to hit performance targets and
inflate executive pay.
All in all, this is a comprehensive package of
reforms and it will be interesting to see how they are
implemented, as well as how effectively they address
the issues identified in the original green paper.
.!iii+

rvebsite, including whether they follow 5

rny formal code.
Previously we argued that the
'esponsibilities of companies should
natch their size and societal impact,
ruhether measured through the number
rf people a firm employs, its position in
.he marketplace or whatever else except
ts ownership structure.
It is good to see this theme running
:hrough the governments proposals. The
:hresholds will need careful consideration
lnd we look forward to working on these as
lElS consults further.

:RC action
/r/e also agree the FRC, working with other
'elevant bodies such as ourselves, should develop
l voluntary set of corporate governance principles
'or larqe private companies.
Although there have been some notable failures in
:rivate companies - BHS being a case in point - there