The driving force behind the executive pay proposals is the perceived spiralling increase in executive pay in recent years. The 2013 corporate governance reforms gave significant new powers to shareholders in relation to executive pay and, indeed, the green paper acknowledges recent improvements in transparency and CEO pay restraint (for background, see feature article “Directors’ remuneration reports: the final picture”). Nevertheless, the government is looking at further refinement to enable companies to demonstrate that they are listening to shareholders and other stakeholders.

The government is covering all bases here as there are numerous options for reform, with a number of further choices within each option. Proposals relate to:

Shareholder voting and other rights. Among several suggestions put forward by the green paper, one option is an annual binding shareholder vote on the remuneration report instead of an advisory vote, either for all quoted companies or only for those that have had a significant vote against pay awards in the previous one or two years. Another option is to require a supermajority (for example, 75%) of votes for the pay policy in the year following the loss of an advisory vote. An alternative proposal is for companies to hold a binding vote on the pay policy more frequently than every three years, although institutional shareholders have already expressed the view that they prefer a three-year cycle and are unlikely to relish having to scrutinise a new policy every year.

Shareholder engagement on pay. The green paper suggests that one option could be to establish a new senior shareholder committee to scrutinise pay arrangements and other issues such as long-term strategy and directors’ appointments. It also proposes encouraging individual shareholders to make their views felt; for example, by forcing brokers to offer underlying investors the option to opt in to voting and wider information rights.

Remuneration committees. Proposals include requiring compulsory consultation with shareholders and the wider workforce in advance of preparing the pay policy, and requiring the chair of a remuneration committee to have served for at least 12 months on a remuneration committee before taking up that role.

Transparency in executive pay. One proposal to encourage transparency is for quoted companies to publish the ratio of CEO pay to pay in the wider company workforce. However, the green paper acknowledges that pay ratios may produce misleading results as the pay ratio in a bank, for example, could be substantially narrower than that in a retail company.

Long-term executive pay incentives. One option in relation to long-term pay incentives is to amend the UK Corporate Governance Code (the Code) to require share awards to be held by executives for a minimum of five years. This option could be combined with a requirement for executives to retain share awards until they build up a shareholding equal to twice gross salary.

The backdrop to this part of the green paper is that there have been a limited number of examples of particularly poor corporate conduct where the views and needs of stakeholders, such as employees, suppliers and pension beneficiaries, are not perceived to have been given appropriate consideration. Under section 172 of the Companies Act 2006 (2006 Act) (section 172), directors must act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. As part of this, directors must have regard to, among other things, the interests of the company’s employees and the need to foster the company’s business relationships with suppliers, customers and others. This is known as the enlightened shareholder value approach.

The government has confirmed that it does not intend to change the unitary board system but presents four options to strengthen the voice of employees, customers and others in the boardroom, and build confidence that section 172 is properly understood and applied (see box “Strengthening the stakeholder voice”). Reform could involve legislation, changes to the Code or an industry-led, voluntary approach. Companies covered could be those of a certain size or with a certain number of employees.

The green paper explores the question of whether and to what extent the UK’s largest privately owned businesses should meet higher minimum corporate governance and reporting standards. It notes that there are around 2,500 private companies and 90 limited liability partnerships with more than 1,000 employees that are not expected to meet the same formal corporate governance and reporting standards as publicly listed companies. The consequences, however, if things go wrong can be equally severe for stakeholders, including employees, customers, supply chains and pension fund beneficiaries, as demonstrated by the collapse of BHS in 2016.

Two options for reform are mooted: applying enhanced standards of corporate governance more widely; or applying reporting standards more consistently.

Extending the Code. One option is to extend the application of the Code to large privately held businesses, although some of its provisions would not be appropriate and, while businesses could explain their non-compliance, if too much is explained away the Code will lose credibility for this purpose. An alternative is for the Financial Reporting Council or a business organisation to develop a separate code that could be voluntary or applied on a comply or explain basis.

Consistent application of reporting standards. The green paper notes the existing enhanced reporting obligations of quoted companies, as defined in section 365 of the 2006 Act, and mentions that these companies have to report a greater level of detail on matters such as the remuneration of individual directors, social and community issues, and greenhouse gas emissions.

In a separate move, the House of Commons Business, Energy and Industrial Strategy Committee launched an inquiry on 16 September 2016 into corporate governance, looking at many of the same areas as the green paper (www.parliament.uk/business/committees/committees-a-z/commons-select/business-energy-industrial-strategy/inquiries/parliament-2015/corporate-governance-inquiry/). While the deadline for written submissions has passed, the inquiry status remains open at the time of writing.

The chair of the inquiry, Iain Wright MP, has stated in response to the green paper that his inquiry will press on even though it might seem that the resolve of the government on getting to grips with corporate governance has weakened. The confluence of this inquiry and the green paper may prove interesting.