The latest attempt to address public concerns about executive excess has raised the possibility of worker representation on boards and an obligation to publish the ratio of executive to average pay, but the Government’s Green Paper on Corporate Governance Reform may have set its sights too low to make an impact. Article by Alan Delaney, Director Maclay Murray & Spens LLP.
While this will be a relief to many companies, there are still a variety of proposals to be considered from an employer’s perspective, at a time when it is not too late to contribute to the debate. The Department for Business, Energy & Industrial Strategy launched its consultation Green Paper on Corporate Governance Reform in November, focusing on three distinct areas: executive pay, strengthening the employee, customer and stakeholder voice, and applying corporate governance standards to large private businesses. The consultation followed publicity around companies such as BHS and Sports Direct – and many others – which had created a groundswell of public anger over the gulf between executive pay and pay for ordinary workers, but it didn’t get off to the finest of starts: the headlines dominated by criticisms that the Prime Minister had backtracked on her earlier suggestion that workers could be represented on boards.
The employee involvement aspect of the proposals have clearly been watered down, and the issue of direct appointments to boards is only briefly discussed in the Green Paper, with the Government making clear this is not proposed. Instead, the options for reform explored include the creation of stakeholder advisory panels for directors to hear from key stakeholders, including employees. Directors would be able to seek the views of such panels on particular issues and panel members could be invited to board meetings whenever relevant agenda issues were to be discussed. The emphasis is, however, on dialogue between the board and advisory panels rather than active participation at board meetings.
Another option is to designate existing non-executive directors to ensure that the voices of key interest groups, especially that of employees, is being heard at board level. This is seen by the Government as a means of inputting that voice into boardroom discussions without adding to boardroom size. It is suggested that the designated NED might chair a board-level committee alongside other relevant board members, such as the HR director. The Green Paper also notes that there is a widespread perception that executive pay has become increasingly disconnected from both the pay of ordinary working people and the underlying long-term performance of companies. As well as it being an area of significant public concern, it points out that a growing number of institutional investors have been speaking out, particularly since the reforms in 2013 which gave shareholders a stronger role in executive pay.
In particular, those reforms introduced new shareholder controls and oversight over executive remuneration in quoted companies. They give shareholders a binding vote on pay policies at least once every three years, and an annual advisory vote on actual pay awards made to directors. Interestingly, the Green Paper notes that a significant percentage of shareholders – 28% on average in FTSE 100 companies – are not making use of these voting rights. A range of options are set out for quoted companies, including making all or some elements of executive pay subject to a binding vote on an annual basis. In relation to transparency, one issue discussed is whether companies should be required to publish ratios comparing CEO remuneration to pay in the wider company workforce. But the Government does not seem particularly keen on the idea, expressing concern that a simple comparison of CEO pay to the median salary in an organisation might well produce misleading results or even lead to the outsourcing of lower paid jobs.
Finally, the Green Paper explores whether and to what extent large privately held businesses should meet higher minimum corporate governance and reporting standards, with the Government appearing to favour adoption of a code of practice on a voluntary basis and extending this to only the UK’s largest companies. Employers already grappling with the uncertainties of Brexit will perhaps be relieved that the Green Paper proposes largely voluntary measures and steers clear of any kind of radical reform. What remains to be seen is whether these measures will deliver on the stated intention to provide reassurance to the public that companies are being run with a recognition of their responsibilities to employees. That debate will continue once clearer details are available after consultation closes on 17 February.
www.gov.uk/government/consultations/corporate-governance-reform
