The committee recommends a series of actions on executive pay, a new and stronger voluntary code of governance for private companies, better reporting by companies on how directors fulfil their duties and responsibilities and a major expansion of the FRC’s role. It also calls for action on improving diversity on company boards.

Its recommendations for the FRC include additional powers to engage and hold to account company directors, with the ability to report publicly to shareholders on any failings of the board collectively or individual members of it, and to initiate legal action for breach of their duties under section 172 of the Companies Act 2006.

MPs also want the FRC to develop a ‘red, yellow, green’ metric system for annual ratings, which the company would be required to include in their annual reports.

The FRC should amend the corporate governance code to require informative narrative reporting on the fulfilment of section 172 duties, with explanations in the annual report from the board on how they have considered different shareholder interests and met the company’s long term objectives.

MPs want the FRC to encourage greater stakeholder engagement, and call for stronger guidelines on the role and responsibilities of non executive directors, particularly where they serve on multiple boards. 

The report states that ‘government should consider re-establishing, renaming and resourcing appropriately the FRC to better reflect its expanded remit and powers.’

In addition, the committee recommends that the government consults upon new requirements on listed and large private companies to provide full information on advisors engaged in transactions above a reasonable threshold, including on the amount and basis of payments and on their method of engagement.

There is also a recommendation that the FRC, Institute of Directors and Institute for Family Business develop a governance code for the largest privately-held companies, who would be asked to contribute to the establishment of a new body to oversee and report on compliance. Should this voluntary regime fail to raise standards after a three year period, or reveal high rates of unacceptable non-compliance, then MPs want to see a mandatory regulatory regime introduced.

Remuneration and bonuses

On pay, the report says that ‘pay levels have now been ratcheted up to levels so high that it is impossible to observe a credible link between pay and performance.’ The committee wants companies to align bonuses with broader corporate responsibilities and company objectives and take steps to ensure that they are genuinely stretching, and says the FRC should assess each company’s approach as part of its corporate governance rating system.

The committee wants long term incentive plans (LTIPs) to be phased out as soon as possible. No new LTIPs should be agreed from the start of 2018 and existing agreements should not be renewed.

Instead, the FRC should consult on establishing deferred stock rather than LTIPs as best practice, along with other limitations on cash bonuses.

The committee also suggests workers be represented on remuneration committees and for the chairs of remuneration committees to be expected to resign if their proposals do not receive the backing of 75% of voting shareholders. It wants the FRC to revise the code to include a requirement for a binding vote on executive pay awards the following year in the event of there being a vote against such a vote of over 25% of votes cast.

There is a call for companies to explain their pay policies better, including publishing pay ratios annually, and to provide more public information about employee diversity, which it also wants the FRC to mandate via an update to the code.

On gender diversity, the committee calls for the government to set a target that from May 2020 at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women, and for companies to explain if they fail to achieve this.

Iain Wright, chair of the BEIS committee, said: ‘Recent scandals and the issue of executive pay have undermined public trust in corporate culture. That, together with rising stakeholder expectations, changing business models and technology, means that corporate governance needs to evolve to provide assurance to investors and wider society.

‘Pay must be reformed and simplified to incentivise decision-making for the long term success of the business and to pursue wider company objectives than share value.’

In a statement in response to the report, the FRC said the committee’s proposals picked up many of its own recommendations, but says these ‘if fully adopted, will have significant implications for the FRC’s remit, resources and funding.’

The FRC said: ‘We agree that the “comply or explain” principle has worked well, not only reflecting the diversity of business models in the UK but enabling the FRC to implement measures that would not have been possible under a harder rules-based system.’

Commenting on the BEIS report Elizabeth Richards, ICAEW head of corporate governance, said some companies ‘will find the proposals challenging’ , but  that the committee’s recommendations ‘have the potential to bridge the growing divide between the public and business.’

‘But whether this is the beginning of a new relationship will depend upon whether companies embrace change or whether they wait to see if new requirements are imposed and then do the minimum to comply,’ she said.

‘Principles of good governance need to cover large private companies as well as public companies. However, there are unanswered questions about which private companies should be covered by a new code and how an oversight body would work for a voluntary initiative.

‘There is no doubt that the issue which really ignites public opinion is executive pay, and the report’s reference to government intervention is a strong statement that the current situation should not be allowed to continue,’ Richards said. 

BEIS select committee report on corporate governance is here.

By Pat Sweet