Corporate governance and executive pay

Written on 2 May 2017

On 5 April 2017, the House of Commons Business, Energy and Industrial Strategy Committee published its 3rd report on corporate governance.

Overall, the BEIS Committee does not believe that there is a case for a radical overhaul of corporate governance in the UK, but considers that there is scope for significant improvements in order to address the changing nature of company ownership in a globalised economy.

It proposes a series of reforms, some of which are potentially ground-breaking, including the independent enforcement of directors’ duties by the Financial Reporting Council.

In relation to executive pay, the report includes a recommendation to abolish long term incentive plans (LTIPs), replacing them with a more simple pay structure (comprising salary, bonus relating to stretching targets and payment by means of equity/deferred stock over the long term). Specifically, the BEIS Committee concludes that no new LTIPs should be agreed from the start of 2018 and existing agreements should not be renewed.

It further recommends that the FRC should consult with stakeholders with a view to amending the UK Corporate Governance Code to establish deferred stock, rather than LTIPs, as best practice in terms of incentivising long-term decision making. Guidelines should also be developed for the structure of executive pay, to ensure that equity vests over a genuinely long period (at least 5 years), without large steps.

The BEIS Committee’s view is that annual binding votes on pay levels are not required at present. Instead, it recommends that the FRC revises the Corporate Governance Code to include a requirement for a binding vote on executive pay awards the following year in the event of there being a vote against such a vote of over 25% of votes cast. This would give companies an opportunity to address any major concerns on remuneration by the following year.

On pay ratios, the BEIS Committee recommends that the FRC works with stakeholders and amends the Corporate Governance Code to require the publication of pay ratios between the CEO and both senior executives and all UK employees.

The report notes that “employee representation on Remuneration Committees would represent a powerful signal on company culture and commitment to fair pay“.  The BEIS Committee recommends this option (although it is not mandatory) and indicates that it would expect leading companies to adopt this approach.