Corporate Matters – September 2017
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Corporate Governance Reform
The Government has published its response to the green paper on corporate governance reform. The […]
The Government has published its response to the green paper on corporate governance reform. The proposed reforms are intended to “improve corporate governance and give workers and investors a stronger voice“.
On 29 August 2017, the Department for Business, Energy and Industrial Strategy (BEIS) published its formal response to the Government’s green paper on proposed reforms to corporate governance. There are three main areas of reform:
- executive pay;
- greater employee and other stakeholder input at board level; and
- corporate governance in large privately-owned companies.
The intention is to implement the reforms so that they apply to accounting periods starting on or after 1 June 2018. The implementation will be via secondary legislation and changes to the UK Corporate Governance Code (the Code).
Executive Pay
CEO pay ratio reporting
Quoted companies will be required to disclose in their annual remuneration report the ratio of their CEO’s pay to the average pay of their UK workforce. There will also be a requirement to include a narrative explaining changes to that ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce.
This new CEO pay reporting requirement will sit alongside the existing requirement to disclose in the directors’ remuneration report the annual increase in CEO pay compared to the annual increase in the average pay of the entire workforce.
Reporting on LTIPs
Secondary legislation will be introduced to require quoted companies to provide a clearer explanation in their remuneration policies of the range of potential outcomes of long-term incentive plans (LTIPs). This will build on the existing requirements governing the content of remuneration policies contained in The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and will tackle the issue of some LTIPs generating awards which are out of line with the original expectations of investors.
Structuring of LTIPs
The Government proposes that the minimum vesting and post-vesting holding period for executive share awards be extended from three to five years to encourage companies to have a longer-term focus when setting pay. BEIS will invite the Financial Reporting Council (FRC) to consult on this proposal. Since many companies are operating their plans on this basis anyway it is not thought that it will meet with much resistance.
Remuneration committees
Remuneration committees will be given broader responsibility for overseeing pay and incentives across the company and to engage with the workforce to explain how executive pay aligns with the wider company pay policy. In addition, the chair of a remuneration committee will need to have served for 12 months on the committee before holding the position of chair. The FRC will be asked to revise the Code accordingly.
Shareholder opposition to pay awards
Premium listed companies which encounter significant opposition (such as a shareholder vote of 20 per cent. or more) to executive pay proposals will need to take specific steps to address the problem. The Investment Association will maintain a public register of listed companies which encounter shareholder opposition along with a record of what the companies say they are doing to address the shareholders’ concerns. In addition the FRC will consult on revisions to the Code to set out the steps which a company should take when they meet with opposition.
Strengthening the employee, customer and wider stakeholder voice
Section 172 compliance
Secondary legislation will be introduced to require all companies of a significant size (probably more than 1,000 employees), both private and public, to explain how their directors comply with the requirement to consider the wider stakeholders when promoting the success of the company under section 172 of the Companies Act 2006.
Employee engagement mechanisms
The FRC will develop a new principle within the Code which establishes the importance of strengthening the voice of employees and other non-shareholder interests at board level. There will be a requirement for premium listed companies to adopt, on a ‘comply or explain’ basis, one of three employee engagement mechanisms:
- a designated non-executive director;
- a formal employee advisory council; or
- a director from the workforce.
Corporate Governance in large privately-held businesses
A corporate governance code for large, private companies
The FRC will be asked to work with other industry bodies such as the IoD, CBI and BVCA to produce a corporate governance code for large private companies. It is thought that the code will only apply to companies with more than 2,000 employees.
Corporate governance reporting
Secondary legislation will be introduced requiring companies with more than 2,000 employees, whether private or public, to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code.
WM comment
The reforms are a somewhat watered down version of those proposals that were trumpeted during Theresa May’s leadership and subsequent election campaigns. They arguably strike a balance between mandatory pay caps and employee board representation at one end of the ideological scale and concerns about snuffing out talent at the other.
The aim of implementation by June 2018 is ambitious since legislation will need to be passed. We will keep you updated on developments and whether or not the timetable is likely to shift.

The new corporate offence of failure to prevent the facilitation of tax evasion
Part 3 of the Criminal Finances Act 2017, creating the corporate offences of failure to […]
Part 3 of the Criminal Finances Act 2017, creating the corporate offences of failure to prevent facilitation of UK and foreign tax evasion, comes into force on 30 September 2017. Similar to the existing failure to prevent offence under the Bribery Act 2010, it will be a defence for the company to prove that when the offence was committed they had put in place prevention procedures.
The Criminal Finances Act 2017 (CFA) received Royal Assent at the end of April 2017. It created a new corporate offence of failing to prevent facilitation of UK and foreign tax evasion. The new offence comes into force on 30 September.
The offence of corporate failure to prevent criminal facilitation of tax evasion applies to companies, partnerships and LLPs. It does not apply to individuals.
An offence will be committed if:
- there is criminal tax evasion under either UK law or foreign law;
- it is enabled by the business’ employee, agent or those performing services to the business; and
- the business fails to prevent that person from enabling the crime.
If convicted a business will face an unlimited fine.
Similar to the existing failure to prevent offence under the Bribery Act 2010, it will be a defence for the company or organisation to prove that when the offence was committed they had in place prevention procedures. Prevention procedures are defined as procedures designed to prevent persons acting in the capacity of a person associated with the company from committing tax evasion facilitation offences.
Section 47 of CFA required the Chancellor of the Exchequer to publish guidance about the procedures that relevant bodies might put in place. This guidance was published in its final form on 1 September 2017 and can be found here. Reasonable procedures will include:
- risk assessments;
- due diligence;
- training for employees;
- a commitment from top-level management to create a culture where tax evasion is never acceptable.
WM comment
It is important that all companies review their compliance manuals to ensure that prevention procedures are put in place to ensure that the defence can be relied upon if necessary. Please contact us if you would like help in this regard.

Consultation on proposed changes to the AIM Rules
The London Stock Exchange has issued AIM Notice 46 to announce that it is consulting […]
The London Stock Exchange has issued AIM Notice 46 to announce that it is consulting on proposed changes to the AIM Rules for Companies and the AIM Rules for Nominated Advisers.
The discussion paper sets out proposals to change the AIM Rules in a number of areas:
- the role of the Nomad, including the possible extension of the early notification process and discussion of the use of the LSE’s discretion under AIM Rule 9 to delay or refuse a proposed admission;
- eligibility criteria and, in particular, whether to mandate a minimum free float requirement or a minimum fundraising threshold;
- the adequacy of existing corporate governance disclosures relating to board composition and corporate governance disclosures under AIM Rule 26;
- possible automatic fines for breaches of the AIM Rules.
WM comment
Responses to the discussion paper were requested by 8 September 2017 after which the LSE will then draft changes to the Rules for consultation. We will keep you updated with the changes.