Worker representation on boards and curbs on executive pay are just two of the items on the agenda for another round of possible corporate governance changes as U.K. companies come under fire yet again for failing to live up to the spirit of earlier reforms.
In a speech as part of her leadership campaign to become the United Kingdom’s second female Prime Minister, Theresa May said that the country needed “deep economic reform,” which includes “getting tough on irresponsible behaviour in big business” and refusing to accept that “anything goes.”
She also said that workers need to have a more vocal stake in the running of the companies they work for and that the state could take a more strident role in protecting U.K. companies from being snapped up by foreign buyers.
“Transient shareholders—who are mostly companies investing other people’s money—are not the only people with an interest when firms are sold or close,” she said in her address in Birmingham on 11 July, referring to the sale of confectioner Cadbury’s to Kraft and the attempted sale of pharmaceuticals company AstraZeneca to Pfizer, which she described as a “U.S. company with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax” (another area that May intends to look at).
May also said she wants to “see changes in the way that big business is governed,” attacking specifically the fact that the pool of non-executive directors is still “drawn from the same, narrow social and professional circles as the executive team” and that “the scrutiny they provide is just not good enough.”
Unsurprisingly, the widening gap between employee and executive pay—which has more than trebled in the past 18 years while the FTSE is trading at the same level (and 10 percent below its high peak)—has also irked the new PM.
To curb fat-cat pay deals, May wants to simplify bonus structures, check that incentives are aligned with long-term strategy, make shareholder votes on corporate pay binding rather than advisory, and ensure full disclosure of bonus targets and the publication of “pay multiple” data: that is, the ratio between CEO pay and average employee pay.
The measures would go further than the changes introduced in 2013 by former business secretary Vince Cable, which were watered down by the Tory members of the then-coalition government. Those reforms have handed shareholders greater power over companies’ executive pay policies by forcing companies to hold a binding vote on prospective pay policy at least once every three years, and an annual advisory vote on the annual report on remuneration.
The mooted proposals have already had a positive response from one of the United Kingdom’s leading business lobby groups, the Institute of Directors (IoD). Oliver Parry, IoD head of corporate governance, says that shareholders should have more say on boardroom pay—especially as “it is still possible for directors to ignore even substantial shareholder rebellions.”
This spring saw some notable examples. Almost 60 percent of investors at BP voted against CEO Bob Dudley’s £14m pay package in a non-binding vote (hardly surprising since the company has just reported its worst-ever annual loss), while 50 percent of investors voted against pay deals at the medical equipment group Smith & Nephew, and 33 percent at advertising company WPP gave a thumbs-down to CEO Martin Sorrell’s £70m package.
The IoD also backs moves to put employees on boards, though it “would stop short of making it compulsory for firms.” The Trades Union Congress (TUC), the umbrella organisation for U.K. trades unions, has long argued for workers to be given seats on company boards and remuneration committees, calling it “a common-sense approach.” “This move would inject a much-needed dose of reality into boardrooms,” says TUC General Secretary Frances O’Grady.
France, Germany, and the Netherlands are among 19 of the 31 European Economic Area countries (the now 27 EU member states, plus the United Kingdom, Norway, Liechtenstein and Iceland) already have worker representation on boards, the numbers varying from one employee up to one-third of the board (or half of the supervisory board) depending on local legislation and/or the size of the enterprise.
However, it is unclear how employee representatives would be appointed or elected to the board if the United Kingdom pushes ahead with the plan. In companies with trade union recognition, the union would want to have a say. In those companies without union recognition, management could be involved in the negotiations.
Some critics of the move have suggested that employee representation in the boardroom would put a brake on dynamism. But Matt Lawrence, a research fellow at U.K. think-tank the Institute for Public Policy Research, believes that it can be “useful for a company to have some grit in the wheels that allows time to think” as “being streamlined and fast-moving can often lead to bad decisions being made.”
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