UK: new prime minister outlines governance reforms

Not so long ago today, and not that far away from where I sit typing this post, the Rt Hon Theresa May MP - now the only remaining contender for leadership of the Conservative Party and, as such, the UK's next prime minister - delivered a speech: see here. The speech set out her priorities for office, which included governance reforms, and was delivered before it was confirmed that she would become prime minister on Wednesday this week.  Here is an extract highlighting her proposals on board membership and executive pay:

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 .... I want to make shareholder votes on corporate pay not just advisory but binding. I want to see more transparency, including the full disclosure of bonus targets and the publication of “pay multiple” data: that is, the ratio between the CEO’s pay and the average company worker’s pay. And I want to simplify the way bonuses are paid so that the bosses’ incentives are better aligned with the long-term interests of the company and its shareholders.

More detailed proposals will follow over the coming months. With regard to shareholder votes on pay, the UK framework currently requires a mandatory vote on policy - held at least once every three years, or when changes to policy are proposed - in addition to an annual advisory vote. It would seem that Mrs May proposes to make the annual advisory vote binding. Would this render redundant the binding vote on policy?  With regard to simplifying bonuses (the call for which has been made repeatedly over the past few years), how will this be achieved?

With regard to the board proposals, much depends on what Mrs May means by "represented on company boards", but the general tenor of her comments suggests that she wants to see dramatic changes through legislation rather than relying on encouraging best practice guidance in the UK Corporate Governance Code, which is the responsibility of the Financial Reporting Council. In this respect it is interesting to note that last month the chairman of the FRC, Sir Win Bischoff, and several of his European counterparts met (describing themselves the 'five chairmen group') and published a statement in which they defended the role and value of governance codes and recommended "a cautious approach in making further legislative proposals on corporate governance issues": see here (pdf).