On 29 November 2016, Greg Clark, Secretary of State for Business, Energy and Industrial Strategy, Greg Clark, made a statement on corporate governance, in the House of Commons.
On the same day, the UK Government issued a Green Paper on some reforms that will have an impact on the payroll and reward professions.
What is Corporate Governance?
Corporate governance is the methodology by which companies act, are directed and are controlled.
One of the major pieces of legislation that controls this is the Companies Act 2006 which sets the legal framework for how some companies are formed and administered.
The 2016 Green Paper – Corporate Governance Reform
Good corporate governance is described in the above Green Paper as ‘having the right checks and balances within big business to strengthen decision making and accountability’. In an attempt to improve transparency, decision making and accountability, the UK Government sought to have a discussion on three reforms:
- Shareholder influence on executive pay
- Measures that could increase the connection between boards of directors and other groups with an interest in corporate performance (such as employees and small suppliers) and
- Extending corporate governance from listed companies to large private companies
The 2017 Responses – Corporate Governance Reform
On 29 August 2017, the UK Government responded to the feedback from the 2016 Green Paper. It outlined a package of 9 corporate reforms, not all of which require legislation. These are:
- Ask the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code
- By Regulations, make quoted companies report CEO pay ratios annually
- Ask the Investment Association (IA) to maintain a public register of listed companies where shareholders have objected to pay awards of 20% or more
- By Regulations, make companies ‘of a significant size’ explain how their directors comply with the duty to promote the success of the company (known as Section 172 in reference to the Section on the Companies Act 2006
- Ask the FRC to consult on establishing a new principle that will strengthen the voice of non-directors at board level
- Ask the Institute of Chartered Secretaries and Administrators (ICSA) and the IA to complete and publish new advice and guidance on ways in which companies can engage with their employees and other stakeholders
- Invite the FRC to work with other relevant bodies to develop a voluntary set of corporate governance principles for large private companies
- By Regulations, to require companies ‘of a significant size’ to disclose their corporate governance arrangements in their Directors’ Report and on their Website
- Ask the FRC, the Financial Conduct Authority and the Insolvency Service to conclude new or, in some cases, revised letters of understanding with each other before the end of 2017
Fast Forward to the 2018 Regulations
On 10 June 2018, the UK Government announced the imminent publication of the Regulations that make up their package of reforms. The headline announcement for payroll and reward professionals is that UK listed companies with more than 250 UK employees will have to publish figures that will show the gap between the Chief Executive’s salary compared to that of their average worker. In addition to publishing this information, the employer will have to justify this difference.
The payroll, HR and reward professions welcome the terminology ‘pay ratio’ to their workloads, publication of which is all designed to improve transparency and accountability. Employers will want to look at The Companies (Miscellaneous Reporting) Regulations 2018and note that they are due to come into effect in January 2019 with the first reporting in 2020. They are written under the ‘draft affirmative procedure’ meaning that they have to be debated in both of the Houses of Parliament. They are currently in the House of Commons.
What do they say?
The Regulations are complicated and impose 6 different reporting obligations on different companies. As the Regulations have to be debated, there seems little point detailing the pay ratio calculation, save to say that there are some similarities to Gender Pay Gap Reporting with regards the terminology that is used. I say that there are some because there are more new features than similarities!
Taken from the FAQ document to help employers prepare for the new Regulations, here is my table of the companies impacted and how they will be affected:
This affects payroll how?
Introducing the pay ratio terminology into the payroll lexicon, employers will expect payroll systems to be able to produce some of this information for them. The calculation has some similarities with Gender Pay Gap Reporting but there are new calculations as well.
The good news is that:
- The Companies (Miscellaneous Reporting) Regulations 2018 will apply across the whole of the United Kingdom, assuming that Northern Ireland give their legislative consent
- The new reporting requirement apply to financial years starting on or after 01 January 2019. Therefore, the first reporting will not be until 2020
Let’s keep an eye out for this one and the progression of the Regulations. Also, let’s hope that there is some clear guidance for employers and software developers.