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Corporate Governance Reform: Business as Usual

Yesterday the government finally responded to the consultation on corporate governance reform they launched last year.

Corporate governance might not be catchy, but it has significant implications, setting out how companies should run and how they make decisions. If we want to tackle excessive high pay and bonuses, or see businesses run in a responsible and sustainable way, we urgently need to see reform of corporate governance.

Prime Minister Theresa May surprised us all in her speech to Conservative party conference last year by supporting reforms to corporate governance, including tackling excessively high pay and introducing workers on company boards. But anyone hoping for real action in these areas will be disappointed by yesterday’s announcements.  

Workers on boards watered down.

The Conservative manifesto proposed three options to promote workers on boards for companies to choose from, and these have been re-announced with the added caveat that the government will be asking the Financial Reporting Council (FRC) to consult on their proposals:

  1. Nominate a director from the workforce.
  2. Create a formal employee advisory council.
  3. Assign specific responsibility for employee representation to a designated non-executive director.

The option to nominate an employee from the workforce might sound promising at first, but the example of Sports Direct demonstrates the pitfalls of an approach that doesn’t include an election, and involvement of a trade union where one is active in the workplace. Sport Direct claimed to have appointed a worker to their board last year, but the worker isn’t a formal board member who can vote on decisions. An employee advisory council would not have any formal powers to vote on board decisions, and there are no suggestions that the board of directors would be obliged to consult such a body at all. To assign responsibility for worker representation to a designated non-executive director is, again, too vague a promise. This could involve anything from adding this responsibility to a corporate website biography, to appointing trade unionists to boards.

Ultimately, these proposals still leave workers on boards to the discretion of individual companies. As we’ve said before, there is no guarantee of a single worker being elected to a company board unless it becomes a compulsory measure. Watch this space for upcoming CLASS research into workers on boards.  

Pay ratios and a register of companies with disgruntled shareholders.

The government focused on new laws for transparency on pay in their announcements yesterday. They have proposed rules to force listed companies to reveal the pay gap between bosses and workers, and to create a register of companies who have faced considerable shareholder opposition to pay packages.

Putting aside the issue that this pay ratio would only show the gap between the average salary and the highest in a company, rather than the real gap between the lowest and highest paid, we should welcome more transparency on pay.

 It would also undoubtedly be embarrassing for a company to be listed as experiencing shareholder opposition to pay packages; but would this change the culture of excessively high salaries and bonuses in UK? Crest Nicolson, the largest housebuilder in Britain, faced embarrassment in March when shareholders symbolically voted against a remuneration report on pay. Despite shareholder anger, the company stated after the meeting that the bonuses at the centre of the dispute would go ahead.

It's clear that transparency measures can’t take the place of substantive reform, which is what we need.

The average pay of a FTSE 100 CEO in the UK increased from £4.1m in 2010 to almost £5m in 2014. In 2015, average pay for FTSE 100 CEOs was £5.3m - this is 386 times the annual income of a worker on the national living wage. By 4 January this year, the average FTSE100 CEO had already made the equivalent of an average UK salary – that’s in just two and a half days. Meanwhile, teachers and midwives are expected lose more than £3000 by 2020 if government policy on public sector wage caps continues, and average wages in real terms still haven’t recovered since the financial crash in 2008.

Pay inequality is getting worse, not better, and naming and shaming companies isn’t enough.

All in all, the government’s proposals for corporate governance reform are a real disappointment. After Theresa May repeatedly spoke out about excessively high pay, and offered her support for workers on boards, many had hoped for strong proposals for corporate governance reform. Unfortunately, yesterday’s proposals mean business as usual for the worst excesses of UK companies.