Corporate Governance and Employee Involvement

Cogs Machinery

 

When taking office as Prime Minister, Theresa May stated that one of her priorities would be to tackle “corporate excess”. Initial suggestions included the appointment of employee representatives to the boards of companies, but, once the practical difficulties involved in this were identified, this seems to be have watered down.

 

However, a Green Paper (consultation document) on the subject of corporate governance has today (29 November 2016) been published which addresses:

  • executive pay
  • strengthening the employee, customer and supplier voice
  • corporate governance in the UK’s largest private businesses

Views are invited on the following main topics

Executive Pay

  • how to hold companies to account on executive pay and performance
  • whether investors need to be encouraged to use existing powers
  • effectiveness of remuneration committees
  • better alignment of long-term incentive plans with long-term interests of companies and shareholders

Another measure under consideration is the publication of pay ratios, which would identify the gap in earnings between the chief executive and an average employee. Former Business Secretary Vince Cable proposed pay ratios in 2012, but the idea did not progress since the view was taken that the figures could be misleading. For example, an investment bank would almost invariably have a lower ratio than a retail business with a large number of lower-paid employees. And at a top football club, the employees would usually be better paid than the directors, but this would provide no insight into how well the business was being run.  In addition, a company which outsources most routine jobs is likely to have a lower ratio than one which directly employs the people carrying out those tasks.

Strengthening the employee, customer and supplier voice

  • how to take account of the views of employees, customers and other stakeholders at board level
  • whether any reform should be one which is legislative, code-based or voluntary

It is worth noting that businesses that are substantially employee-owned already provide employees with a significant voice, either at board level or, far more commonly, through an employee ownership trust (EOT) which has regular dialogue with directors. While the subject of employee ownership is outside the scope of the Green Paper, it is a concept which enjoys all-party support and would offer an alternative means of achieving some of the Government’s declared aims.

Corporate governance in the UK’s largest private businesses

  • whether the existing code for listed companies should be extended or a new code introduced for private companies
  • which companies should be within the scope of any new code
  • whether any new code should be underpinned by legislation or be voluntary

Responses to the Green Paper can be submitted before 17 February 2017 to:

Corporate Governance Reform Team

Department for Business, Energy & Industrial Strategy

3rd Floor Spur 1

1 Victoria Street

London SW1H 0ET

You can find a copy of the Green Paper by following this link https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/573120/beis-16-56-corporate-governance-reform-green-paper.pdf

You can find further information about the employee ownership of businesses on our website where you will also find some animated illustrations.