A review of the rules on corporate governance has been launched as businesses call for shareholders to be given power to make the final decision on executive pay.
Accounting watchdog the Financial Reporting Council is looking to overhaul the corporate governance code, which could see firms adopt tighter controls when it comes to the paypackets of their top bosses.
The FRC, which launched the review yesterday (16 February), is looking to extent its powers so that it can take disciplinary action against all directors where there have been reporting breaches.
The watchdog also called on executive pay to be linked to the performance of companies, and said boards should pay more attention to the views of stakeholders.
The Confederation of British Industry has called for shareholders to be granted more powers to curb excessive executive pay.
It recommended that a binding vote be triggered if shareholders vote against board remuneration, and said there needs to be more focus on the discrepancy between the pay of executives and average workers.
Last year, Prime Minister Theresa May published a Green Paper on corporate governance reform which looked for views on a number of proposals which look to curb excessive corporate pay.
The FRC said it would take into account the issues raised in the government’s Green Paper.
Sir Win Bischoff, chairman of the FRC said: “The Prime Minister has a vision of an economy that, in her words, ‘works for everyone’.
“This needs UK businesses to thrive so that all stakeholders including workers, customers, suppliers and society itself benefit through jobs growth and prosperity.”
Sir Win said the FRC’s review will aim to strike a balance between the principles and provisions of the governance code.
“In pursuing any changes, the current strengths of UK governance: the unitary board, strong shareholder rights, the role of stewardship and the ‘comply or explain’ approach, must be preserved.
“We must not throw out the baby with the bathwater.”
The FRC will consult on its proposals later this year, based on the outcome of the review and the government’s response to its Green Paper.
Sir Win said any changes to the regulatory framework will be done carefully and by consulting a wide range of stakeholders.
Earlier this week, MPs called for some private companies to comply with the same governance standards as listed companies.
The CBI also recommended that companies should have to report how they are taking action on behalf of shareholders.
Paul Drechsler, CBI president, said executive pay has become a “lightning rod” for public discontent.
“The CBI is absolutely clear that the unacceptable behaviour of the few does not reflect the high standards and responsible behaviour of the vast majority of companies.”
He said the CBI’s proposals hope to address some of the issues that have undermined the reputation of business.