U.K. prime minister proposes stronger corporate governance measures

Theresa May
Prime Minister Theresa May

The U.K.'s Pensions and Lifetime Savings Association and investment managers welcomed a green paper from Prime Minister Theresa May aimed at addressing executive pay and strengthening the corporate governance code.

Ms. May on Tuesday unveiled the preliminary proposal outlining corporate governance reform.

The paper called for good governance and appropriate consideration for “other stakeholders — such as employees, suppliers and pension beneficiaries,” saying the “recent failure of BHS has demonstrated they all suffer when a private company fails.” The U.K. Pensions Regulator is working to seek redress on behalf of 20,000 participants following BHS' insolvency earlier this year.

According to the paper, shareholder influence on executive pay has grown much faster over the last two decades than typical corporate performance. Ms. May is seeking to “ensure that executive pay is properly aligned to long-term performance, giving greater voice to employees and consumers in the boardroom, and raising the bar for governance standards in the largest privately held companies.”

“Our members are concerned by the rising levels of executive pay and believe the justification for this increase is weak, and we are pleased that the government's green paper is expected to include proposals that we have previously advocated, including the publication of intracompany pay ratios,” said Luke Hildyard, policy lead for stewardship and corporate governance at the PLSA, in a statement.

Leon Kamhi, head of responsibility at Hermes Investment Management, said: “Whilst we would have liked the government to go further and propose elected employees on boards, we are encouraged to see recognition for the clear benefits that are gleaned from greater employee voice in a company's governance.”

“Whilst it is not a panacea and the appropriate ratio will differ from company to company, increased transparency provided by the publication of the CEO-to-median-employee pay ratio is to be welcomed as it puts pressure on boards to explain the rationale behind the level of executive remuneration and disparities in pay across the organization,” Mr. Kamhi said.

The paper also called for the strengthening of the U.K. Corporate Governance Code to provide clarity on how companies should engage with shareholders on pay.

“Options might include setting out a process for remuneration committee engagement with shareholders including pension funds before the annual remuneration report is presented to the (annual general meeting),” the paper said.