UK: Government publishes corporate governance reform proposals

The Government today published its corporate governance reform proposals, following the publication of a green paper last year: see here (pdf). The proposals, contained in a response document (and therefore lacking the precision that would be expected in a white paper), are principally concerned with directors' remuneration and employee and stakeholder voice. Some proposals will require legislation but others - in the form of "invitations" - are directed to the Financial Reporting Council for consideration as part of its forthcoming review of the UK Corporate Governance Code. This raises interesting questions about the status of the Financial Reporting Council and, indeed, the way in which the Code is updated. When the FRC says that it is "independent", what does this mean?

New secondary legislation is proposed, for example, to require all companies of significant size to explain how the directors comply with section 172 of the Companies Act 2006 in respect of those factors to which they are required to have regard (e.g., the interests of the company's employees; the impact of the company's operations of the community and environment). Amongst the invitations sent to the FRC is one suggesting that the FRC consult on a new Principle in the UK Corporate Governance Code "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". As part of this, the FRC has been invited to consider and consult on a new Code provision requiring premium listed companies, on a comply or explain basis, to adopt one of three employee engagement mechanisms (a designated non-executive director; a formal employee advisory council; or a director from the workforce).