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New requirements for companies to reveal pay ratio between bosses and workers

The government has announced a series of reforms aimed at increasing boardroom accountability and enhancing trust in business. These are a partial implementation of pledges in the Conservative manifesto for the May 2017 general election, which itself was much less alarming to businesses than Theresa May’s July 2016 Conservative party leadership campaign pledge to have employees represented on company boards.

The proposals are that, on an annual basis:

  • around 900 listed companies will have to publish and justify the pay ratio between CEOs and their average UK worker;
  • all companies of a significant size will have to publicly explain how their directors take employees’ and shareholders’ interests into account;
  • all large companies will have to make their responsible business arrangements public.

Around 900 listed companies will have to publish and justify the pay ratio between CEOs and their average UK worker

There will also be:

  • A public register where a fifth (20%) of investors in a listed company have objected to management annual pay awards;
  • measures seeking to ensure employees’ interests are better represented at board level – this would be done by asking the Financial Reporting Council (FRC) to introduce a new requirement in the UK Corporate Governance Code.

The code works on a “comply or explain basis.” Businesses would either have to assign a non-executive director to represent employees, create an employee advisory council, nominate a director from the workforce, or explain why they have not implemented any of the above measures. The government will also ask the FRC to develop a set of entirely voluntary corporate governance principles for large private companies.

The government intends to bring these legislative measures into effect by June 2018. However, due to present political uncertainty and competing priorities it would not be surprising if the proposed measures were shelved for the time being, or perhaps even indefinitely.

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