Out-Law News 3 min. read

Conservatives pledge better employee representation on company boards

A new Conservative government would require listed companies to ensure the interests of their employees are sufficiently represented at board level, according to the party's manifesto.

The commitment is one of several proposals put forward by the party to ensure that boards "take account of the interests not just of shareholders but employees, suppliers and the wider community", according to the document.

The manifesto proposes giving companies a choice of three ways to comply with the new requirements: by nominating a director from the workforce; creating a "formal employee advisory council"; or assigning responsibility for employee representation to a designated non-executive director. Employees would also be given the right to request "information relating to the future direction of the company", subject to certain safeguards, according to the manifesto.

Writing in the Financial Times last week, party leader and UK prime minister Theresa May said that a Conservative government would "take action to ensure that employees have a greater stake in the companies they work for".

"I will ensure that there is representation for workers on company boards and that every employee has a statutory right to receive information about key decisions affecting their company's future," she said.

"This will be no more than the information that shareholders currently receive - but we will extend to those who invest their labour the same information available to those who invest their capital," she said.

If elected, a new Conservative government would also consult on ways to strengthen the corporate governance of privately-owned businesses, according to the manifesto.

The manifesto also contains new commitments on executive pay, share buybacks and corporate takeovers. A new Conservative government would make executive pay packages subject to "strict annual votes" by shareholders, while listed companies would be required to publish "the ratio of executive pay to broader UK workforce pay". The government would also commission an "examination" of the use of share buybacks, with the intention of preventing their use "artificially to hit performance targets and inflate executive pay".

"The proposal appears to be for annual binding shareholder votes on remuneration and incentives paid, vested or awarded for the relevant financial year to each individual executive director," said executive remuneration expert Graeme Standen of Pinsent Masons, the law firm behind Out-Law.com. "Such binding shareholder votes could cause serious practical difficulties for quoted companies, even if the final statutory amendments are optimally drafted - for example, to relate only to bonus and LTIP amounts not yet paid or vested, proposed salary or benefit increases to be implemented after approval and proposed LTIP awards to be granted after approval."

"Likely results of the enactment of this proposal - which are probably also its intended effects - would be that quoted companies would become more restrained and cautious in shaping remuneration packages; and quoted company consultation with investors on remuneration proposals would become even more extensive and detailed. Investors might find that executive remuneration takes up even more of their investee engagement effort, at least at first; but also that their influence in such consultations would be considerably increased," he said.

"The proposal on pay ratios is a refinement of the green paper proposal for reporting of CEO: median worker total remuneration. Given that quoted companies often have large non-UK workforces of very varied composition, and that the relevant political and social sensitivities are UK-specific, it may be sensible and practical to mandate disclosure of the ratio of executive pay to broader UK workforce pay, rather than the originally proposed CEO: median worker ratio. On the other hand, from the perspective of the individual quoted company or group and the investors holding its shares, the omission of similar disclosures about the non-UK workforce may make little commercial or investment sense," he said.

The party has also committed to extending newly-introduced gender pay gap reporting requirements for large businesses to also cover information on the pay gap between people from different ethnic backgrounds. Similar reporting or 'pay audit' requirements have also been proposed by Labour and the Liberal Democrats in their pre-election manifestos, while Labour have also proposed the introduction of a 'civil enforcement system' to ensure compliance with gender pay gap reporting.

On corporate takeovers, the Conservative manifesto includes commitments to ensure that "all promises and undertakings made in the course of takeover bids can be legally enforced afterwards" and to allow the government to "require a bid to be paused to allow for greater scrutiny". The government would also take action to "ensure that foreign ownership of companies controlling important infrastructure does not undermine British security or essential services".

The party has also committed to "simplify" the tax system, particularly for small businesses and the self-employed. It would maintain the planned reduction of the headline rate of corporation tax to 17% by 2020, legislate for "tougher regulation" of tax advisory firms and "take a more proactive approach to transparency and misuse of trusts", according to the manifesto.

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