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Brace Yourselves, Politics Is Coming

Stephen Davis and Jon Lukomnik | May 5, 2015

for DeAnnPicture this as a fresh governance requirement: Every corporate board must have a worker sitting on the compensation committee.

If that seems far-fetched, think again. Britain’s Labour party has cemented exactly that pledge into its manifesto for the May 7 general election, kicking off a season where politics—both in the United Kingdom and the United States, with our numbingly-long presidential campaign—is once again poised to upend settled practices. The last time politics drove corporate governance on a grand scale on these shores started with candidate Barack Obama’s promises in the 2008 presidential campaign. It culminated in 2010 with President Obama signing the Dodd-Frank Act. Now with the “silly season” again upon us, it is time to brace for a new round of politician and lawmaker activism.

Before surveying the home front, let’s look at Britain, since its governance practices often wind up migrating here (think say-on-pay and majority voting). Its election could be something of a harbinger. Despite shareholder votes on compensation, high levels of pay continue to draw public ire, particularly in the financial sector still blamed for triggering the financial crisis.

During the British off-season, corporate governance tends not to split along party lines. In fact, there is a thriving all-party parliamentary committee that meets periodically for quiet breakfast sessions on corporate governance issues. But with the starting gun for the election campaign fired earlier this year, politicians have staked out widely differing positions.

Prime Minister David Cameron’s Conservatives are not enthused about changing the corporate governance status quo, but the Liberal Democrats, with whom they now serve in a coalition, have dragged them into the reform debate. Now, even the Tories feel obliged to address popular fury over banker pay. The party’s 2015 manifesto states, “To ensure that new pay structures for bankers rebuild trust and reduce short-termism, we will ensure that Britain continues to have the toughest regime of bonus deferral and clawback of any financial center.” The manifesto is otherwise silent on corporate governance.

The Labour Party, on the other hand, is promising to take Britain where no English-speaking market has gone before in corporate governance. For starters, its campaign platform pledges “requiring employee representation on remuneration committees.” Moreover, it states, “We will improve the link between executive pay and performance by simplifying pay packages, and requiring investment and pension fund managers to disclose how they vote on top pay.” Labour also promises action to curb takeovers it says reflect a “culture of short-termism.”

Leader Ed Miliband would “enhance the role of long-term investors by restricting voting to those already holding shares when a bid is made.” And he would compel institutional investors “to prioritize long-term growth over short-term profits for the companies in which they are investing.” We’re not sure how he’d do that. But he would do something.

Bottom line: If Labour wins power, the election will have paved the way for Britain to drive corporate governance into new territory. Could the U.S. general election campaign do the same here? Early signs suggest yes.

Polls show a close race between Labour and Tories, with third parties likely to hold the key to power. For Labour, one partner could be the Scottish National Party, set to sweep votes in Scotland. The SNP shares Miliband’s vision of requiring workers as corporate directors; the party’s manifesto declares support for “increased employee representation on company boards.” And the SNP seems to propose what would be the most ambitious quota for women in Europe: “We will push for 50:50 representation on public and private boards.” Liberal Democrats, a potential ally of either Cameron or Miliband, have also been forceful advocates of gender diversity on corporate boards.

Bottom line: If Labour wins power, the election will have paved the way for Britain to drive corporate governance into new territory. Could the U.S. general election campaign do the same here? Early signs suggest yes.

Take the Democrats, or to be more accurate, the Democrat. In her debut presidential campaign speech in Iowa on April 14, overwhelming favorite Hillary Clinton declared, "There’s something wrong when CEOs make 300 times more than the typical worker.” She didn’t offer a solution, but having flagged the issue—borrowing rhetoric from Sen. Elizabeth Warren—she can hardly neglect to offer one as the campaign moves on. In fact, her own pollsters must have identified that hitting corporate greed is a vote magnet as much in the United States as it is in Britain. Employee directors may not be Clinton’s prescription; but binding say-on-pay votes, perhaps?

Among Republicans, none of the so-far declared candidates—Sens. Ted Cruz, Rand Paul, and Marco Rubio—are especially identified with corporate governance issues. In fact, none serve on the Senate Banking Committee, which has taken a lead role in past lawmaking. Even Republicans still in the wings are not especially known for taking positions in corporate governance.

The exception is Carly Fiorina, ex-CEO of Hewlett-Packard, who is reported to have plans to announce in May. She is no favorite of shareowners, given the collapse of H-P’s share price on her watch in the 2000s. But she can and does speak about corporate governance, even sounding a Hillary Clinton note when recently decrying that “crony capitalism is alive and well.”

But judging from the views of other Republicans and from the U.S. Chamber of Commerce, we expect GOP candidates to sound a common theme of campaigning for a rollback of legislation in Dodd-Frank. They argue that it creates excessive red tape and a drag on business. Should a Republican win the White House, the congressional door could open on a range of far-reaching acts—including curbs on longstanding rules on shareholder proposals.

One warning, though. Don’t expect presidential candidates to be the only players in election season to drive policy action on corporate governance in the United States. Yes, the Chamber of Commerce and the Business Roundtable and a host of lobbying groups have corporate governance in their sights, from both the left and the right. But executive compensation and political spending have created fuel for more populist uprisings as well. The Occupy movement, though now largely dormant, showed how a sudden groundswell can help drive the political tide.

For a glimpse of what might lie ahead, check out the cunning, Marvel-comics-style social media campaign by Avaaz and the Corporate Reform Coalition to push for rules from the Securities and Exchange Commission on corporate disclosure of political contributions. It is called “Where Is Mary Jo White?” (www.whereismjw.com, or on Twitter #WhereIsMJW).

The spectacle suggests that while the next 18 months may indeed be the silly season, the stakes are deadly serious.