UK listed companies will have to reveal the pay ratio between chief executives and their average worker under the government’s new corporate governance reforms, announced today.
Business secretary Greg Clark set out the reforms, the aim of which is to enhance the public’s trust in business. They are the result of a thorough consultation process and will be brought into effect by June 2018.
The reforms will also see the creation of a public register of listed companies at which a fifth of investors have objected to executive annual pay packages.
Clark is seeking to ensure employees’ interests are better represented at board level of listed companies. All companies of a “significant size” will be required to publicly explain how their directors take employees’ and shareholders’ interests into account.
He said: “Today’s reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.”
The Financial Reporting Council (FRC), creators of the UK Corporate Governance Code, is to be asked to introduce a new requirement in the code so that improved board-level representation of employees can be achieved.
Under the code’s ‘comply or explain’ basis, firms would have to either assign a non-executive director to represent employees, create an employee advisory council, or nominate a director from the workforce.
The FRC is to also work with the business community and the government to develop a voluntary set of corporate governance principles for large private companies.
Keith Grint, professor of public leadership and management at Warwick Business School, said the government’s reforms concerning the ratio of CEO pay to average employee earnings are unlikely to change very much.
“The ratio has been growing for decades, shows no sign of decreasing, has never been related to any kind of company performance.
“In the UK and the US, we seem to have a romantic attachment to ‘heroic’ individual leaders that bears little relationship to the actual impact – good or bad – that individual leaders have; Germany and Japan have a closer attachment to collective and technical leadership and the rewards for CEOs are proportionally smaller.”
He went on to say the proposals for worker representatives on boards are constrained: “First by the point that it might not even be worker representatives, but those appointed to represent their interests, however that is defined, and second by the voluntary and limited nature of the regulations.”
Stephen Martin, director general of the Institute of Directors, disagreed, stating he believes Clark is taking a “sensible approach” on giving workers a bigger say.
“All directors are responsible for the whole company, so any with the specific remit to speak for employees must be adequately trained and aware of their responsibility to promote the long-term success of the business,” he added.
UK tech companies that are listed and will, therefore, need to report pay ratios include Alfa Financial Software Holdings Plc, which floated in May; and Edinburgh-based FinTech company FreeAgent, which floated on AIM in November 2016.