Crawling slowly towards stakeholding in the UK

This post has been contributed by Mr Christopher Riley, Module Convenor for Company law.

In November 2016, the UK Government launched a review of UK corporate governance.  In the ‘Green Paper’ setting out the terms of the review (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/584013/corporate-governance-reform-green-paper.pdf), the UK Prime Minister, Theresa May, wrote that ‘big business must earn and keep the trust and confidence of their customers, employees and the wider public’, and she spoke of the need to reform UK corporate governance to build ‘an economy that works for everyone, not just the privileged few’.

Such comments suggested the Government was determined to ensure that larger companies give greater weight to the interests of their ‘stakeholders’.  Now, after almost a year listening to the views of others, the Government has published its own proposals, in Corporate Governance Reform (August 2017), available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640470/corporate-governance-reform-government-response.pdf

Three of these proposals will indeed move the UK a small way along the path towards stakeholding:

• First, legislation is to be introduced requiring ‘all companies of a significant size’ to explain in greater detail ‘how their directors comply with the requirements of section 172 (Companies Act 2006) to have regard to employee interests and to fostering relationships with suppliers, customers and others’.
• Second, the Government is going to ask the Financial Reporting Council (FRC), which has responsibility for reviewing the UK Corporate Governance Code, to reform that Code to emphasise ‘the importance of strengthening the voice of employees and other non-shareholder interests at board level’. In particular, the Government envisages the Code will be updated to require listed companies to adopt, but only on a ‘comply or explain’ basis, one of the following three alternative mechanisms for improving employee engagement:
  – designating a non-executive director to ensure employees’                                                voices are heard at board level; or
  – creating a formal employee advisory council; or                                                               – appointing a director from the workforce.

  

• Third, the Government also intends to legislate to require quoted companies to include more information in the company’s ‘annual remuneration report’ about the ratio between the CEO’s pay and the average pay of their UK workforce. This addresses some of the public anger at excessive executive pay, and goes back to the Prime Minister’s comments that the fruits of a company’s success should be shared not just by those at the top, but by all employees, since all will presumably have contributed to that success.At this stage, these are merely proposals, and we shall have to see whether legislation, or changes to the UK Corporate Governance Code, do actually appear.  But even if they do, they arguably represent, at best, a very limited recognition of the importance of a company’s stakeholders to the success of large companies.