Government Green Paper on Executive Pay and Corporate Governance, November 2016 Jane Williams

UK has world leading corporate governance, based on four pillars Company and financial markets law coupled to: Accountability and transparency Unitary Board System – Directors collectively responsible for board decisions UK Corporate Governance Code – stewarded by the FRC What are current governance challenges?

Focus on three areas for improvement Executive Pay the impact on society balanced with developing talented leaders and the economy Strengthen the stakeholder voice in the Boardroom employees, customers and suppliers Extend corporate governance into UK’s largest private companies

CEO Pay Growth This growth in total stems from the value of the annual bonus and LTI The FTSE 100 stock market indices hovers about 6000 from 1998 - 2016 Difficult to judge the link to individual company performance: needs detailed analysis Other countries with a similar problem: US, Australia, Sweden, Swiss, France, Belgium, NL

EXECUTIVE PAY 2013 Executive Pay Reforms Binding vote every 3 years on remuneration policy Advisory vote every year on actual pay awards Applicable to companies listed in the UK, EEA and NY

EXECUTIVE PAY 2013 Executive Pay Reforms 93% acceptance of remuneration policy by shareholders, 1 binding vote lost and 6 advisory. 28% shareholders not voting due in part to nominee accounts/proxy votes 2016 95% companies disclosed measures, some retrospective, of which 70% bonus targets 2016 CEO pay restraint, FTSE 100 2% median increase

EXECUTIVE PAY Context Need to attract and retain the talented executives – an important dynamic Economic growth a necessity – avoid a ‘burden of regulation’ Disconnect between rate of increase in executive pay related to corporate performance and average earnings Significant public concern Institutional investors now influencing with remuneration principles Government recognises the need for flexibility to allow companies to set their own policy.

EXECUTIVE PAY PROPOSALS Strengthen shareholder voting rights – annual binding vote Greater shareholder engagement on pay – shareholder committee Strengthen role of Remuneration Committee with consultation/knowledge Further transparency on pay – CEO pay ratio to Executives and employees. Effectiveness of long term incentives – future direction Comprise 1/3rd total remuneration of CEO package formerly 5% Proxy almost standard measures TSR/EPS, issues over long term value/ control Scheme length too short at 1-3 years, perceived as complex

Strengthening the employee, customer and wider stakeholder voice Stakeholder Definition and Processes Stakeholders are primarily employees, customers, and suppliers Establish Stakeholder Advisory Boards (with reporting requirement) Designated NEDS to represent voices of key interest groups Appoint individual stakeholder representatives to company Boards Increased disclosure and reporting on stakeholder interests

Strengthening the employee, customer and wider stakeholder voice Further options Who is responsible for the development and execution of this new culture? Chairman, Remuneration Committee, CEO, HR Director Consider: Designated NED for stakeholder group, coupled to an advisory panel and reporting What is the right action to implement? Legislation, change to CG Code or both, or Industry led voluntary approach with FRC guidance and advice Consider impact of pensioners as stakeholders and more diverse Boards on outcomes

‘To Corporate Govern or not to Corporate Govern ‘To Corporate Govern or not to Corporate Govern?’ Large privately held businesses Background Ownership and control are intertwined so different standards. Defining good governance not owner/manager relationship A privilege from limited liability that the company is well run Currently three sources of governance in the UK: the FRC and Corporate Governance Code, the QCA and the IOD What are the right criteria for defining inclusion within a governance framework?

‘To Corporate Govern or not to Corporate Govern ‘To Corporate Govern or not to Corporate Govern?’ Large privately held businesses Options Apply enhanced standards of governance more widely Extend FRC CG code though might not be applicable FRC or IOD prepare a separate bespoke code supported by best practice principles, any adoption to be voluntary Apply standards of governance more consistently Different bodies, FRC, QCA, IOD prepare governance now includes BCVA PE companies In future governance apply to size of company, e.g. employee numbers rather than legal entity.

Summary Corporate Governance Future Direction Defining the problem Agreeing any resolution Effective execution