Corporate governance | proposals for reform of executive pay

The government published its response to the green paper consultation on corporate governance reform on 29 August 2017, setting out measures which are intended to “improve corporate governance and give workers and investors a stronger voice.”

It identifies nine headline proposals for reform, over the areas of executive pay; strengthening the employee, customer and wider stakeholder voice; and corporate governance in large privately-held businesses.

We summarise the package of main policy measures which the government intends to take forward and comment here.

Separately, on 22 September 2017, the Business, Energy and Industrial Strategy (BEIS) Committee published the government’s response to its 3rd report on corporate governance.

The key points from an executive pay perspective are:

• the government agrees that bonus and other executive remuneration should ensure that directors are incentivised to take decisions which support the long-term success of the company. As set out in its response to the green paper, the government will ask the Financial Reporting Council (FRC) to extend the recommended minimum vesting and post-vesting holding period for share awards from 3 to 5 years. Secondary legislation is to be introduced to ensure that executive remuneration policies are clearer about the range of potential outcomes from longer-term share plans.
• the government believes that companies should continue to have the flexibility to choose the long-term share remuneration policies and models (which are put to investors for approval). However, companies and shareholders should be more open to alternatives to the “currently dominant” LTIP model.
• the government does not intend to legislate to introduce a binding vote on executive pay awards the following year in the event of there being a vote of 25% or more of votes cast against them.
• the government supports the recommendation to require quoted companies to publish pay ratios between the CEO and both senior executives and all UK employees.

The acknowledgement that companies should have flexibility to choose appropriate long-term incentive arrangements, taking into account the alternatives to LTIPs, will be welcomed. This represents a more realistic approach than the original BEIS Committee recommendation that LTIPs should be phased out as soon as possible.