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Factbox - Britain's plans to regulate company behaviour
November 29, 2016 / 3:16 PM / a year ago

Factbox - Britain's plans to regulate company behaviour

LONDON (Reuters) - Britain announced proposals on Tuesday to encourage more responsible corporate behaviour, part of Prime Minister Theresa May’s drive to support the millions of people she says voted for Brexit in protest at ‘out of touch’ elites.

The plans will be discussed by a wide range of interested parties before a ‘White Paper’ is published setting out the government’s proposals for future legislation. This may also be consulted on before a formal bill is presented to parliament.

The box below summarises the options put forward by the government on:

- executive pay

- strengthening stakeholder voices in boardrooms

- improving governance in large privately held businesses.

Green Paper here: here

EXECUTIVE PAY

The government identified options for reform in five key areas: shareholder voting and other rights; shareholder engagement on pay; the role of remuneration committees; pay disclosure; and long-term pay incentives.

Shareholder voting and other rights

1) Make all or some elements of the executive pay package subject to a binding vote.

2) Introduce stronger consequences for a company losing its annual advisory vote on the remuneration report.

3) Require or encourage quoted company pay policies to (a) set an upper threshold for total annual pay (from all elements of remuneration), and (b) ensure a binding vote at the AGM where actual executive pay in that year exceeds the threshold.

4) Require the existing binding vote on the executive pay policy to be held more frequently than every three years, but no more than annually, or allow shareholders to bring forward a binding vote on a new policy earlier than the mandatory three year deadline.

5) Strengthen the Corporate Governance Code to provide greater specificity on how companies should engage with shareholders on pay, including where there is significant opposition to a remuneration report.

Shareholder engagement on pay

1) Mandatory disclosure of fund managers’ voting records at AGMs and the extent to which they have made use of proxy voting.

2) Establish a senior shareholder committee to engage with executive remuneration arrangements.

3) Consider ways to facilitate or encourage individual retail shareholders to exercise their rights to vote on pay and other corporate decisions.

Role of the remuneration committee

1) Require the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy.

2) Require the chairs of remuneration committees to have served for at least 12 months on a remuneration committee before taking up the role.

Transparency in executive pay

1) Pay ratio reporting

2) Disclosure of bonus targets

Long-term executive pay incentives

1) Consideration of ‘restricted share’ awards as an alternative to LTIPs.

2) Extension of holding periods for share options to five year minimum.

3) A requirement for executives to retain share awards until they build up a shareholding equivalent to 2 x gross total salary.

STRENGTHENING BOARDS

The government said it wanted to examine approaches to strengthening the stakeholder voice at board level in large UK companies, particularly the voices of employees and customers.

1) Create stakeholder advisory panels.

2) Designate existing non-executive directors to ensure that the voices of key interested groups, especially that of employees, is being heard at board level.

3) Appoint individual stakeholder representatives to company boards.

4) Strengthening reporting requirements related to stakeholder engagement.

CORPORATE GOVERNANCE IN LARGE PRIVATELY-HELD BUSINESSES

The paper also looked at whether and to what extent Britain’s largest, privately held businesses should meet higher minimum corporate governance and reporting standards.

1) Applying enhanced standards of corporate governance more widely.

2) Applying reporting standards more consistently.

Context:

- Pension funds have warned that Britons have lost trust in executive pay levels, and some FTSE 100 companies like BP (BP.L) and WPP (WPP.L) have faced shareholder revolts over the issue.

- The average pay of bosses in Britain’s FTSE 100 rose more than 10 percent in 2015 to an average of 5.5 million pounds ($7 million), meaning CEOs now earn 140 times more than their employees on average, according to a survey released in August.

- In August, BHS, an unlisted department store chain, closed down with the loss of 11,000 jobs and a huge hole in its pension fund which could leave 20,000 pensioners facing cuts to their income.

Politicians blamed the retailer’s high-profile demise on tycoon Philip Green’s greed and disregard for corporate governance, calling it “the unacceptable face of capitalism”.

- Over the last year, sportswear chain Sports Direct (SPD.L) was found to be paying its workers less than the minimum wage in conditions compared to a Victorian workhouse triggering widespread condemnation by lawmakers.

- France passed laws earlier in November granting shareholders a binding vote on CEO pay structures, starting next year, and on actual payouts from 2018. Previous French “say on pay” votes have lacked legal force.

- New proposals over employee representation on boards could borrow heavily from Germany, where works councils can wield real power over a company’s strategy.

- Investors in UK-listed companies already have the right to block longer-term pay policies, typically those put to a vote every three years.

Reporting by Sarah Young and William James, editing by Louise Heavens

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