& Securities

This post is part of our occasional series, “A view from abroad,” which looks at key developments around the world which may affect multinational companies or which may influence the development of U.S. law and practice.

On the day she launched her campaign to become the U.K.’s Prime Minister, Theresa May said, in a speech made in the industrial heartland of Birmingham:

“I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders. In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m Prime Minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but employees as well.”

The U.K. has often led the world in the field of corporate governance, so many expected these statements to herald another wave of significant changes.

The concept that boards of directors of U.K. companies should consider the interests of consumers, employees and other stakeholders as part of their legal duty to promote the success of the company for the benefit of its shareholders is already enshrined in the Companies Act 2006.^[1]  The Act effectively requires directors, when taking action which takes account of the interests of consumers or employees, to have the aim of creating long term sustainable growth for the benefit of shareholders.  Mrs. May’s comments show that she feels these general legal duties are not enough.

The publication of a discussion paper^[2] on corporate governance from the U.K.’s Department of Business, Energy and Industrial Strategy represents the first step in the reforms which the Prime Minister announced.  The discussion paper is often referred to in the U.K. as a “Green Paper” to distinguish it from a “White Paper,” which contains concrete proposals on which the government seeks comment.  Mrs. May’s radical vision of representation of consumers and workers on the boards of large companies seems to have been watered down over the past few months.  Far from suggesting a system analogous to the German Mitbestimmung (co-determination), the discussion paper concentrates on three particular areas and raises questions about how reform could be approached.  If adopted, it is likely that most of the proposals would impose additional duties on U.K. companies and their directors under amendments to the Companies Act 2006.  The areas discussed are:

• Executive pay: Although the U.K. already has “say on pay” legislation requiring advance shareholder approval every three years of the remuneration policy applied by U.K. public companies, the discussion paper notes that this has not reduced the disparity between senior executive pay and the pay of other employees. It suggests annual say on pay votes on bonuses and other variable compensation, and perhaps a firm monetary upper limit approved by shareholders for executive pay.  Another idea in the discussion paper is that remuneration committees should be under an obligation to consult large shareholders and representatives of workers.
• Stakeholder involvement in boards: The discussion paper suggests various ways in which workers and consumers could be involved in the deliberations of the boards of large U.K. companies. This include the formation of stakeholder panels with which boards would be obliged to consult, designating certain non-executive directors as specifically representing the interests of employees and/or consumers.  It recognises the confidentiality problems and other practical issues with direct appointments to the board of stakeholder representatives.
• Governance of large private companies: This part of the discussion paper results from public dissatisfaction with standards of governance at some of the U.K.’s largest private companies, particularly those owned by the families of some of the more flamboyant businessmen within the U.K. The discussion paper recognises that the U.K. Corporate Governance Code, which is designed for public companies, cannot simply be applied to privately owned companies.  However, it asks whether there are elements of the Code which could be applied to larger private companies, for example, requirements for the appointment of independent non-executive directors and some of the reporting requirements relating to stakeholder engagement.

The discussion paper requires comments by mid-February 2017 and is expected to lead to some more concrete proposals in the second half of 2017.  Politically, it is unlikely that nothing will change: but it also seems unlikely that the changes which occur will be more than an evolution of what is already in place for U.K. public companies.  We can be sure that other countries with developed market economies will be watching what the U.K. does with interest.

[1] Section 172

[2] Referred to in the U.K. as a “Green Paper” to distinguish it from a “White Paper” which contains concrete proposals on which the government seeks comment.