Half of the board members in UK companies should be women, according to a report from members of the UK parliament, which recommends that the government sets a target from May 2020 for new boardroom appointments.
The view comes as part of a raft of recommendations from MPs on the House of Commons business, energy and industrial strategy (BEIS) committee, which would represent significant reform of UK corporate governance.
Among them is a call for the UK’s governance code to make an explicit demand on boards to report on how they have managed their companies for the “long term”. It also calls for companies to report on how they serve the interests of all stakeholders.
MPs also seek new powers for the UK’s governance watchdog, the Financial Reporting Council (FRC), over company directors and calls for the end of long-term incentive plans (LTIPs) as a means of correcting excessive executive pay. However, it rejects the idea of annual binding votes on pay packages.
The committee fails to back the introduction of worker representatives to boards, but does say that where they are already in place they appear to raise few of the of the issues, critics claim.
Measures outlined in the report are only recommendations; however, they may have some influence over the final outcome of the government’s consultation on corporate governance launched at the end of last year.
The BEIS committee concluded: “These reforms are not intended to create onerous new requirements, but to establish arrangements to ensure that the better enforcement of the Companies Act 2006, to improve the voice of other stakeholders, including employees, and to require companies to engage in a more open and transparent manner with the public.
“Their aim is to ingrain permanently the values and behaviours of excellent corporate governance into the culture of British business.”
The report’s recommendations attempt to adjust the focus of company purpose with calls to introduce reporting on how company directors meet their duties under the 2006 Companies Act.
MPs said: “We recommend that the FRC amends the code to require informative narrative reporting on the fulfilment of section 172 duties.
“Boards must be required to explain precisely how they have considered each of the different stakeholder interests, including employees, customers and suppliers and how this has been reflected in financial decisions.
“They should also explain how they have pursued the objectives of the company and had regard to the consequences of their decisions for the long term, however they choose to define this. Where there have been failures to have due regard to any one of these interests, these should be addressed directly and explained.”
On women in the boardroom, the committee said the aims of existing work by Sir Philip Hampton and Helen Alexander should be extended, and called for companies to report on why they fail to meet the proposed new targets.
“We believe that the aims and targets of the Hampton-Alexander Review should go further and, in support of the Equality and Human Rights Commission’s objective, we recommend that the government should set a target that from May 2020 at least half of all new appointments to senior and executive management-level positions in the FTSE 350 and all listed companies should be women.”
The committee takes a strong line on pay, calling for the publication of pay ratios, and seeks revisions to the UK corporate code that would shift recommended best practice in executive pay away from LTIPs to deferred stock.
The MPs said: “We recognise that the job of leading a major company is extremely taxing and requires great skill and commitment. These roles, given their importance, should be appropriately rewarded. But overall pay levels have now been ratcheted up to levels so high that it is impossible to observe a credible link between pay and performance.
“At a time when average pay has remained relatively stable, these increases have served to undermine public trust in business.”
The committee also sought new measures for non-executive directors, with a request that the governance code offers guidance on how they should be held to account.
The FRC responded to the report by saying it would have “significant” implications for its responsibilities and funding “if fully adopted”.
“In its considered and far-reaching report the committee recognises the important role of the FRC in policing corporate behaviour and supports our call for more powers to be able to hold directors to account for their responsibilities under section 172 of the Companies Act.
“The committee’s proposals pick up many of the FRC’s recommendations to help restore trust in business,” said an FRC statement.
The Confederation of British Industry (CBI) welcomed the report with a measured response. On boardroom diversity, Carolyn Fairbairn, CBI director general, praised voluntary moves to improve gender diversity.
“In the short term, improving voluntary transparency and reporting on these two areas – with clear targets set by businesses themselves – should be our first priority. At this time, legal options are not likely to be the best tool to achieve good progress,” she said.
On pay, Fairbairn opposed the outright removal of LTIPs.
“Pay ratios have a role to play, providing that they focus on providing meaningful context, if they are to add value in this debate.
“The committee is right to reject annual binding votes on executive pay as disproportionate.
“While complexity remains a problem with long-term incentive plans, banning them outright would reduce flexibility for companies to reward their senior leaders.”