British businesses must act on corporate governance, executive pay including long-term incentive plans, and boardroom diversity to maintain the country's strong international standing in corporate governance, says the Business, Energy and Industrial Strategy Committee in its report.
While recognising the overall strength of the UK corporate governance system, the report notes the damage caused by high-profile failings and a dramatic ratcheting up of executive pay in recent years, at a time of stagnant wage growth for many workers. 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 role and powers of the FRC, with a new rating system for companies to be assessed for their corporate governance performance.
On executive pay, the Committee calls for businesses to simplify the structure of executive pay and put an end to long-term inventive plans (LTIPs), which lack transparency and which can distort decision-making. The Committee also suggests workers be represented on remuneration committees and for the chairs of remuneration committees to be expected to resign if shareholders fail to approve the company's pay policy. The report calls for companies to explain their pay policies better, including by publishing pay ratios annually.
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 ambition.
Iain Wright MP, Chair of the Business, Energy and Industrial Strategy Committee, said:
"The UK corporate governance system is recognised throughout the world as of high quality. However, 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.
The rise of "ownerless companies", where no single investor has a sufficiently large stake in the business to act as a responsible owner, checking performance and behaviour, provides a significant challenge to sound corporate governance. Successful, productive and profitable companies cannot be disconnected from society. Businesses have wider responsibilities than short-term profits; they have a responsibility to their employees, their suppliers, and to the communities in which they operate.
Executive pay has been ratcheted up so high that it is impossible to see a credible link between remuneration and performance. 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.
The collapse of BHS highlighted the damage which private companies can do. A new Code for private companies will help to ensure that high standards of corporate behaviour are observed by our leading firms, improving their public reputation and making them more attractive to investment."
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