The FRC had outlined its approach to future developments in corporate governance last December in a letter to the Business, Energy and Industrial Strategy (BEIS) select committee suggesting then it needed more enforcement powers and also that Section 172 of the Companies Act should be made more effective. The FRC made this point again in its response to the green paper.
The FRC said that the duty, contained in Section 172 of the Companies Act, on directors of all companies to promote the success of the company, and in so doing have regard to a range of other factors, such as long-term consequences, the environment, employees, suppliers and customers needed to be reinvigorated. Additionally, the FRC said, that companies should be required to report more effectively on how they have discharged this duty.
Addressing executive remuneration the FRC said that the role and remit of the remuneration committee should be extended to cover pay policies throughout the organisation. Remuneration policy and payments, the regulator believes, should have a much clearer link to delivery of strategy, focusing strategy and outcomes which deliver long-term company performance.
Addressing voting by shareholders the FRC suggested that the corporate governance code should be revised to make it clearer when companies should report on significant levels of opposition to a particular resolution. When the opposition related to a vote on remuneration the FRC said that the Code should be supported by legislation which would outline escalating actions that would be required if companies received recurring votes against remuneration reports. This could trigger a requirement for a remuneration policy vote being brought forward or for a binding vote on the remuneration report.
The FRC said that the government could use its powers given under Section 1277 of the Companies Act to develop regulations requiring disclosure of voting if it believed that disclosure would encourage shareholders to use their existing powers on remuneration. However, the FRC warned that too much dependency on voting could result in dependency on proxy advice.
The regulator said it supported the government’s suggestion that corporate governance principles be extended to private companies and said that it would be suited to develop these. Any developments needed to be underpinned through regulation, the FRC said.
In its response to the green paper, ICSA suggested that the definition of corporate governance had changed and broadened. The Cadbury Committee in 1992 had defined it as ‘the system by which companies are directed and controlled’ while in its 2015 principles of corporate governance the OECD defined its purpose “To help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.”
ICSA said that executive pay in UK companies had never been more regulated, but only a small minority of companies received objections to their remuneration policy from shareholders in 2016. ICSA believes it would be best to evaluate the impact of the 2013 regulations before considering further changes to shareholder powers. Autumn 2017 would be a better time to evaluate the remuneration when the results of the 2017 AGM peak season and, therefore, the results of the 2013 reforms, can better be assessed, ICSA suggested.
The FRC recently announced plans for a review of the UK corporate governance gode. The FRC said this would take account of its work with others on corporate culture and succession planning, and the issues raised in the government’s green paper and the BEIS Select Committee inquiry. This review was welcomed by ICSA, the professional body for company secretaries.
Separately the Financial Conduct Authority (FCA) has launched a discussion paper to gain feedback on how the UK primary capital markets can most effectively meet the needs of issuers and investors. Additionally it is consulting on proposed technical enhancements to the Listing Rules. The deadline for responses is the 14th May.
Andrew Bailey, FCA Chief Executive, said: “The FCA has an overarching strategic objective of ensuring markets function well, and a key part of that is ensuring the UK’s primary markets remain effective.
“This review considers some important questions about the primary markets, and some potential enhancements, to ensure they continue to meet the needs of investors and issuers effectively.”