Corporate governance: 'employee voice' and workplace reporting

Some of the most eye-catching changes apply to listed companies, but there are also new requirements for many unlisted companies.

The changes are introduced through different sources, including the latest UK Corporate Governance Code ('the Code') and amended corporate reporting law and regulations. Different elements also apply to different types of company. Action will be required by heads of HR departments, company secretaries, in-house counsel and boards themselves.

The revised rules will apply for financial years beginning on or after 1 January 2019, so the first affected reports will be those published in 2020. However, companies should not wait until drafting those reports to engage with the reforms. Instead, they should be implemented early in the first affected financial year, if not before.

'Employee voice' and workforce engagement

Under the revised Code, boards must engage with employees and the wider workforce to enhance the 'employee voice' in the boardroom. This may be achieved using a director appointed from the workforce; a workforce advisory panel; a designated non-executive director; or a combination, for example a designated non-executive who is working with an advisory panel. If the company does not opt for any of these it must choose, explain and justify alternatives.

The Code also requires the board to set workforce policies consistent with company values and long-term sustainable success.

Remuneration committees must:

• review workforce pay (wider than just employee pay) and related policies;
• justify executive pay, including by reference to pay ratios (see below) and pay gaps. Gender pay gaps, perhaps ethnicity and, in future, other factors should be referred to;
• explain to the workforce how executive pay aligns with wider company pay policy.

The Code applies to UK premium equity-listed companies on a 'comply or explain' basis, whether or not UK-incorporated. It provides a general corporate governance benchmark and applies on the same basis to some other UK exchange-traded companies, such as AIM companies which have chosen to apply the Code.

Employee engagement

Amended regulations will require the directors' reports of all UK companies and corporate groups with more than an average of 250 UK employees over the year to cover:

• various aspects of UK employees' involvement in the company's affairs (as already required);
• engagement by the board with UK employees; and
• how the board had regard to UK employees' interests in taking its decisions during the reported year.

Although the first of these requirements already applies, the new requirements may encourage companies to consider their responsibilities more conscientiously.

Pay ratios

UK-listed UK companies, and other UK 'quoted companies' with more than an average monthly total of 250 UK group employees in a financial year will be required to disclose CEO:UK employee pay ratios and related information and explanations in their annual directors' remuneration reports.

UK-listed non-UK companies are likely to make the same disclosures on a voluntary basis.

Reporting on directors' duties to employees and other stakeholders

Section 172 of the 2006 Companies Act requires directors of UK companies to act as they consider will best promote the company's success for the benefit of all shareholders, having regard to six relevant matters ('s172 matters') and similar factors. Three of the s172 matters relate to stakeholders other than shareholders:

• employees' interests (note that this is not restricted to UK employees);
• fostering relationships with customers, suppliers and others, including some non-employee workers, if any;
• the impact of the company's operations on the community and the environment.

These requirements have applied since 1 October 2007 without detailed reporting on compliance. Under new reporting requirements, certain UK boards will now need to explain how they had regard to the s172 matters when taking decisions during a financial year. They will be required to do this in their strategic, rather than directors', report.

The new reporting requirements apply only to certain companies: broadly, to UK companies which are not small or medium-sized for the purposes of reporting exemptions. However, directors of all companies should be aware of the changes, as this change indicates that the compliance of all UK directors with s172 is now of a higher priority and may attract more attention.

In contrast with the new Code provisions, parts of the new reporting requirements refer specifically to 'employees' rather than the wider workforce. In addition, for the purposes of defining which companies fall within scope of the new requirements, only number of employees counts towards some thresholds. However, it could be misleading and possibly risky to assume that boards subject to the new requirements can give much less consideration to their number of non-employee workers.

In particular, boards of companies with a significant number of non-employee workers should consider this issue carefully. Other workers are often company stakeholders in a similar way to employees. In addition, while the new stakeholder reporting rules expressly refer only to the specified s172 matters, s172 itself was consciously drafted to make that list non-exhaustive and to encourage boards to consider both those specified matters and appropriate additional factors which may be most relevant to each board decision.

Similarly, although some of the existing and new workforce-related requirements focus on UK employees only, companies and groups with a workforce both in the UK and elsewhere should consider how to engage and relate productively to their whole workforce while complying with the UK-specific requirements, the s172 duties to stakeholders wherever they are based and their legal duties under both UK and non-UK employment and general law.

Reporting rules and expectations

The newly-required information will sit alongside information already required by existing company law and other reporting rules about employees, total employee pay costs, the workforce, directors' remuneration and gender pay gaps.

Investors also have best practice expectations for directors' remuneration and workforce reporting which are regularly updated, and which are especially relevant to listed companies, AIM companies and others. Companies should consider how best to integrate and present all of this information as a whole, both to investors and to their workforce.

Corporate governance reporting for larger unlisted companies

Larger unlisted companies will now be required to disclose their corporate governance arrangements in their directors' report and on their website, including whether and how they follow any formal corporate governance code - for example, the Wates Principles for Large Private Companies, which were recently published for consultation.

Although detailed compliance requirements will vary from those applicable to listed companies, some of the underlying principles – and the existing s172 duties – are universal.

Suzannah Crookes and Graeme Standen are corporate law and employee incentives experts at Pinsent Masons, the law firm behind Out-Law.com.