Corporate governance reform – draft secondary legislation

Published on 04 July 2018

In response to its green paper public consultation on reforming corporate governance, the UK government has proposed a number of pieces of secondary legislation.

What is happening?

Drafts of the legislation were due to be published in March 2018 but are now expected in June 2018, to be applied from January 2019.

Why does it matter?

Secondary legislation is expected in the following areas. Many of these are likely to impose additional obligations on retail businesses.

Executive pay

  • Listed companies will be required to report annually on the ratio of CEO pay to the average pay of their UK workforce, as well as explaining changes to that ratio and how the ratio fits in the context of pay and conditions across the rest of the workforce. 

Strengthening the employee, customer and supplier voice

  • Public and private companies of a significant size will have to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 which requires them to have regard to employee and other interests in pursuing the success of the company.

  • In addition to the guidance produced by the Governance Institute and the Investment Association in September 2017, the government has also invited FTSE 100 General Counsels to prepare guidance on the practical interpretation of the directors’ duties in section 172.

Corporate governance in large, privately-held businesses

  • Companies of a significant size, which are not already subject to an existing corporate governance regime, will be required to disclose their corporate governance arrangements in their Directors’ Report and on their website, including whether they follow any formal code.

  • In this area, the government has also invited the Financial Reporting Council (FRC) to work with a number of stakeholders to develop a voluntary set of corporate governance principles for large private companies. The FRC has created a “Coalition Group” which will be chaired by James Wates CBE of the Wates Group.

What action should you take?

  1. Review the draft proposals and identify those which could affect your business.

  2. Monitor developments in this area particularly when the draft legislation is laid before parliament.

  3. Review any relevant guidance or principles as these are likely to assist in understanding what is required and how you can be compliant.

  4. In advance of the entry into force of the legislation, begin to put in place necessary systems and procedures.

  5. If in doubt, seek advice on the extent to which the proposals apply to your company and the means by which they should be implemented.
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