Policy paper

2010 to 2015 government policy: Corporate accountability

Updated 8 May 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

© Crown copyright 2015

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This publication is available at https://www.gov.uk/government/publications/2010-to-2015-government-policy-corporate-accountability/2010-to-2015-government-policy-corporate-accountability

This is a copy of a document that stated a policy of the 2010 to 2015 Conservative and Liberal Democrat coalition government. The previous URL of this page was https://www.gov.uk/government/policies/making-companies-more-accountable-to-shareholders-and-the-public Current policies can be found at the GOV.UK policies list.

Issue

Shareholders and the public have lost confidence in the way companies are run. They believe that companies should be rewarded for success, not failure.

Making companies more accountable in how they work - and showing that they are improving - will increase investor and public confidence, making them more attractive to investors and giving the public more trust in their products and services.

Actions

To make companies more accountable to their shareholders and the public, the government is:

Background

The Financial Reporting Council’s (FRC) UK Corporate Governance Code, launched in 2010, sets out good principles for running a company board.

The FRC’s UK Stewardship Code makes investors more answerable to their clients and beneficiaries.

The FRC have a detailed explanation about why they are improving these codes and how they fit into government regulation in the UK approach to corporate governance.

In July 2012 Professor Kay published his review of equity markets, looking at how investment in UK public companies influences the decisions they make and their long-term performance.

In November 2012 the government published its response, welcoming the Kay report and accepting Professor Kay’s analysis and conclusions. See the full background on the review, including responses to the call for evidence and the consultation, and the government’s response.

In October 2014 the government published a further report setting out achievements made by the government, regulatory authorities and market participants carrying out the recommendations in the ‘Kay review of UK equity markets and long-term decision making: implementation progress report’.

We also published some independent research into the way long-term investors measure the performance of companies and of their investment funds. See ‘Metrics and models used to assess company and investment performance’ (BIS research paper 190) for more details.

We also asked a panel of experts to consider if it would be possible to limit the rights of short-term shareholders during a takeover bid. The discussion concluded that it would be extremely difficult to introduce this policy measure because of a series of legal and technical issues. It also concluded that the measure would not prevent short-term shareholders influencing a takeover bid. See the note of the discussion on ‘Limiting the rights of short-term shareholders during takeover bids: practical and legal issues’ for more details.

Case studies

Appendix 1: Ending unacceptable bonuses in the financial sector

This was a supporting detail page of the main policy document.

As part of wider reforms, we have taken action to end unacceptable bonuses in the financial sector.

Given its unique position in the UK economy it has been necessary to go further with remuneration reforms in this sector. The reforms we have introduced are designed to ensure remuneration remains flexible, but does not encourage excessive risk-taking, or threaten financial and economic stability.

In January 2011, we introduced the Financial Service Authority’s new Remuneration Code. Under the Financial Services Act 2012, this Code continues to apply but now falls under the remit of the Prudential Regulation Authority.

The Code sets out several requirements that banks, building societies and some investment firms have to meet when setting pay and rewards for staff, including:

  • a significant portion of bonuses are deferred for at least 3 to 5 years, and are linked to the performance of the employee and their firm
  • a large portion of bonuses are paid in shares or other securities, rather than in cash
  • banks and other financial services firms must disclose further detailed information about the pay of senior individuals, including those earning above £1 million

More broadly, the Banking Reform Bill, includes several further measures designed to curb risk within the banking sector.

Appendix 2: Making employee ownership more accessible

This was a supporting detail page of the main policy document.

Employee ownership is where employees have both a voice in how the business is run through employee engagement and a stake in the success of the business. The Employee Ownership Association estimates that the combined annual turnover of businesses that have employee ownership is at least £30 billion.

For more information on how employee ownership works see the Employee Ownership Association website, or for co-operative models of employee ownership, see Co-operatives UK.

Research has shown that employee ownership (EO) can provide benefits for the economy, business and employees. The government is focusing on private sector employee ownership as a method for generating growth in the economy.

Businesses that want to move to employee ownership should read our ‘Employee ownership: model documentation and guidance’.

Employees can learn more about how to request a move to employee ownership in the ‘Moving to employee ownership: brief guide for employees’.

The benefits of employee ownership

Employee ownership can provide businesses and employees with greater flexibility and the ability to ride out difficult economic conditions. It can also encourage greater levels of employee engagement, which in turn has been shown to produce more innovation and productivity.

CASS Business School conducted research for the Department for Business, Innovation and Skills (BIS) on ‘Employee ownership advantage: benefits and consequences’. It found that businesses with employee ownership were much better able to survive difficult market conditions, creating jobs faster than businesses without employee ownership. It also showed that businesses with employee ownership:

  • plan more for the long term
  • get more of their growth from adding new customers
  • invest more in people
  • have a more positive media image

What the government is doing to encourage employee ownership

We appointed Graeme Nuttall as an independent adviser on employee ownership and he produced a report ‘Sharing success: the Nuttall review of employee ownership’ in July 2012 in which he identified 28 recommendations under 3 themes:

  • raising awareness of EO
  • increasing the resources available to support EO
  • reducing the complexities around EO

The government published its response to the Nuttall review, setting out an action plan for implementation, on 30 October 2012.

The government published its ‘One year on’ report on the implementation of the Nuttall review on 19 November 2013, alongside a ‘Call for evidence on amending the rule against perpetuities and further reducing the complexity of employee ownership’.

Employee Ownership Day

BIS, with the support of the Employee Ownership Association, launched the first national Employee Ownership Day on 4 July 2013. Employee Ownership Day aimed to raise awareness of employee ownership as an economically strong and balanced business model. This was one of the key themes of the ‘Nuttall review of employee ownership’.

Employee Ownership Day was supported by:

  • the Employee Ownership Association
  • Co-operatives UK
  • Co-operative Development Scotland
  • the Wales Co-operative Centre
  • the Federation of Small Businesses

Background

To find out more about employee ownership, you can access the following publications on our site:

Reports

Consultations

Employee ownership implementation group

We set up the implementation group on employee ownership in response to the Nuttall review, to oversee work to implement the recommendations of the review. The group consisted of representatives from the employee ownership sector, and relevant financial, legal and professional organisations and officials from across government.

The group met for the last time on 17 July 2013.

Employee ownership mailbox

To send comments or feedback on any issues relating to employee ownership and the implementation of the Nuttall Review, email: employeeownership@bis.gsi.gov.uk.

Appendix 3: Improving company non-financial reporting

This was a supporting detail page of the main policy document.

We ran a consultation in 2010 to find out what improvements could be made to non-financial reporting. We published the ‘Future of narrative reporting’ in 2012, proposing a new format for reports.

The new format would replace a ‘business review’ with a ‘strategic report’ and quoted companies would have to report on:

  • their strategy
  • their business model
  • the number of women employed at different levels in the organisation

We published draft regulations in October 2012. The proposed changes became law on 1 October 2013, after an extensive consultation process with industry and other stakeholders.

See also information on pay reporting.

This was a supporting detail page of the main policy document.

In 2012 and 2013 shareholders challenged the boards of several of the UK’s top companies about rapidly increasing executive pay and long term company strategy. This became known as the ‘shareholder spring’.

Investors and businesses agree that there has to be a better link between executive pay and performance.

We have passed new laws and regulations that will:

  • give shareholders more power to prevent rewards for failure and make sure that pay is linked to performance
  • make it easier for shareholders to understand what directors are paid and will be paid
  • encourage better relationships between companies and shareholders

To implement these reforms, the Enterprise and Regulatory Reform Act gave shareholders new powers to vote on directors’ pay. Secondary legislation to improve the transparency of pay reporting has also been passed.

All reforms to directors’ pay came into force on 1 October 2013. See our Frequently Asked Questions for more details. Industry led guidance has also been published by a working group of companies and investors.

We have consulted extensively with businesses, shareholders and the wider public to ensure these reforms are workable. In September 2011 we published the ‘Executive remuneration discussion paper’ looking at the problems with directors’ pay. The paper received a large number of responses and in March 2012 we published a further consultation on enhancing shareholder voting rights.

In June 2012 we published a further consultation on revised remuneration reporting regulations, followed by a second draft of those regulations in March 2013.

Appendix 5: Increasing representation on boards of listed companies

This was a supporting detail page of the main policy document.

In 2010 government commissioned Lord Davies of Abersoch to find out what was preventing women becoming board members and to develop a strategy to increase the number of women on the boards of listed companies.

In September 2010 Lord Davies began a consultation that included senior business figures, women business leaders, entrepreneurs, executive search firms (headhunters), investors, women’s networks and women who are just below senior board level.

His report ‘Women on boards’ was published in February 2011 and set out 10 recommendations to increase the number of women on boards.

Its main recommendations were that:

  • all chairmen of Financial Times and Stock Exchange (FTSE) 350 companies should set targets for the percentage of women they aim to have on their boards in 2013 and 2015: see the list FTSE 350 published targets for ‘Women on boards’ report recommendation 1 (MS Word Document, 411KB)
  • FTSE 100 boards should aim for a minimum of 25% female representation by 2015
  • chairmen should announce what they intend to do to increase female representation on their boards by September 2011
  • all chief executives will review the percentage of women they aim to have on their executive committees in 2013 and 2015

See the ‘Women on boards’ annual reviews and updates for progress in implementing the recommendations.

The Voluntary Code of Conduct

Executive recruitment firms help their clients increase the proportion of women on their boards and in senior management roles. The ‘Voluntary code of conduct for executive search firms’ recognises this and encourages firms to use the code in their own organisation.

The code sets out 9 principles of best practice on gender equality. These principles cover everything from ‘succession planning’ and writing gender-neutral job descriptions, to supporting candidates and the induction process.

Executive recruitment firms should monitor their own progress and publish a commitment to the code on their website and in other marketing materials.

See who has signed up to the code.

Process for signing up

The code is voluntary, self-regulated and relevant to all firms active in senior level recruitment.

To sign up, executive recruitment firms should:

  • review the code’s relevance to their business
  • enlist the support of the board and senior partners within the firm
  • evaluate current practice
  • make action plans to fix processes and practice that are not to code
  • communicate support for the code widely within the firm and in external marketing
  • set targets for progress, and then monitor and report on progress, at least internally

When your firm has started to fulfil these criteria, it can become a signatory to the code. Contact Michael Reyner or Denise Wilson

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