The UK government wants listed companies to annually report the ratio of CEO pay to the average pay of their UK workforce, according to a package of corporate governance reform measures unveiled today.

Companies would also have to explain any changes to that ratio from year-to-year.

The government also plans to bolster the requirement for company directors to consider a wide group of stakeholders’ interests when making decisions for shareholders’ benefit.

However, the UK’s pensions trade body gave the reforms a muted welcome.

Luke Hildyard, stewardship and corporate governance policy lead at the Pensions and Lifetime Savings Association (PLSA), said the requirement to report and explain the gap between CEO pay and the average workforce was to be welcomed, but that the PLSA would have liked to see stronger requirements placed on companies with respect to their CEO pay policies.

84% of UK pension funds are concerned about the pay gap in listed companies, with 86% believing that executive pay in listed companies is too high

The PLSA had recommended that the government require advisory votes on pay reports to achieve a supermajority of, for example, 75%, rather than a simple majority of 50%, to make it harder for companies to pass pay proposals despite “serious reservations from their most engaged shareholders”.

According to the PLSA, 84% of UK pension funds are concerned about the pay gap in listed companies, with 86% believing that executive pay in listed companies is too high.

The government has also taken up a proposal from the UK’s asset management trade body for it to set up and maintain a public register of companies that have faced significant shareholder opposition (more than 20%) to executive pay awards.

In the register, the Investment Association would record what those companies say they are doing in response to the concerns.

The public register is said to be the first of its kind.

Some investors, however, played down the need for reform.

Mike Fox, head of sustainable investments at Royal London Asset Management, said: “The current system does seems to be working: shareholders have become more proactive, the vast majority of companies have responded appropriately and this is the key reason why chief executive pay has fallen by almost 20% this year.”

The government had introduced welcome flexibility for companies to increase diversity and representation in the board boardroom, he added, but a requirement to report the pay ratio between bosses and workers would not be “meaningful”.

“It will show large discrepancies between sectors depending on the nature of the workforce and the results could easily be manipulated,” he said. “[A]ny new measures that are introduced need to add value to what is already in place.”

Beefing up s172

The government has developed nine main reform proposals across three aspects of corporate governance: executive pay; the employee, customer and supplier “voice”; and corporate governance in large private businesses. The proposals follow a consultation launched in November.

Directors of a UK company are already legally obliged to have regard to the interests of employees, customers and wider stakeholders through section 172 of the Companies Act. However, the government said many respondents felt this legal requirement “could be made to work more effectively through improved reporting, [Corporate Governance] Code changes, raising awareness and more guidance”.

It said it therefore intended to introduce secondary legislation to require public and private companies of significant size to explain how their directors comply with section 172.

Introducing the reform proposals, prime minister Theresa May said that “some directors seem to have lost sight of their broader legal and ethical responsibilities”.

The UK Corporate Governance Code, which is looked after by the Financial Reporting Council (FRC), could also be changed to incorporate a new principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business”.

The government said it plans to invite the FRC to consult on the development of such a new principle, and on a Code provision that would require companies to adopt, or explain why they hadn’t, one of three employee engagement mechanisms:

  • a designated non-executive director,
  • a formal employee advisory council, or
  • a director from the workforce.

The government has also set its sights on corporate governance of privately-held UK businesses, in line with the thinking set out in its consultation paper.

It wants to see the FRC work with trade bodies to develop a voluntary set of corporate governance principles for large private companies, and to introduce a corporate governance reporting requirement for private companies of a significant size.