UK corporate governance reforms

Corporate governance reform is very much on the agenda in the UK, where the influential Parliamentary Business, Energy and Industrial Strategy Committee has opened hearings on its wide-ranging corporate governance inquiry.

The Australian Institute of Company Directors (AICD) is watching the inquiry with interest, given the the potential relevance for Australian regulation. The inquiry follows British Prime Minister Theresa May’s promise to “clean up” big business and improve corporate governance in the UK. The terms of reference for the UK inquiry cover three broad areas:

  • Directors’ duties – including whether the law should be changed to add new duties on directors to protect the long-term interests of companies, promote transparency and take into account the interests of broader stakeholders more explicitly.
  • Executive pay – including ideas to mandate disclosure of pay ratios, regulate bonus structures, set ceilings for bonus payments or total CEO salary, and make current advisory votes on remuneration reports binding.
  • Composition of boards – with a focus on lifting diversity (gender, age, ethnicity, skills) on boards, adding worker representation to boards or remuneration committees, and boosting women in executive pipeline roles.

Prime Minister May’s commitment to mandate worker representation on boards has proved a lively topic of debate. A UK Treasury discussion paper due shortly is expected to outline options to boost worker engagement, following push-back from leading UK firms arguing it could blur governance accountabilities and focus.

Worker representation on corporate boards is a new concept for the UK (and Australia), but is more common in Europe. Germany’s worker representation rules require a third of supervisory boards to be comprised of employees for firms with between 500 and 2,000 employees, and a 50 per cent representation for firms with over 5,000 staff.

In the Netherlands, workers’ councils can recommend a third of the board, although recommended individuals are generally independent professionals.

Meanwhile, diversity on UK boards remains a hot topic following the release of consultation paper One by 2021: Cultural Diversity Review. Led by businessman Sir John Parker, it proposes that boards of FTSE 100 firms commit to having one person of colour on their boards by 2021.

The UK government-backed Hampton-Alexander Review of Women on Boards has also called for an increase in the number of women in senior executive pipeline roles, to further boost gender diversity in corporate leadership.

Appointments to ASX 200 boards

The AICD recently released the Female and Male Director Appointments to ASX 200 Boards (2014-2016) report. It dispels the notion that candidates – notably female candidates – are only appointed to ASX 200 boards when they have experience with other ASX 200 boards. The report found that 62.5 per cent of male candidates and 57.1 per cent of female appointments possessed no ASX 200 non-executive directorships prior to their appointment. The report also examines the skills, qualifications and experience of the female and male appointees, their membership of the AICD and participation in our programs.

To read the report visit: companydirectors.com.au/advocacy

QLD environment laws

In April, Queensland passed new laws to allow the Department of Environment and Heritage Protection to issue environmental protection orders (EPOs) to a company’s “related persons”. The Act is very broad and could see directors being personally issued with an EPO, irrespective of whether or not they had authorised or permitted the company’s breach. The Act also has the potential to apply to banks, insolvency practitioners, former owners and counterparties of a company.

The AICD has argued that the law should only target those who are culpable.

We have recently written to the Queensland Government with other stakeholders, asking for changes to the law.

The AICD has also provided input on statutory guidelines (released for consultation in November) that will give effect to parts of the new law, seeking to improve its application to directors. Importantly, while the guidelines are likely to provide clarity for some persons on their risk of being issued with an EPO, as subordinate legislation they are unable to remedy the deficiencies with the Act itself. We will continue to advocate for the Act to be amended.