Michael Littlechild of GoodCorporation finds that green paper proposals do not go far enough to tackle the problem of executive pay

Back in July, newly elected Prime Minister Theresa May called time on “irresponsible” corporates. Big business, it was said, needed to change. Strong governance was required to enable companies to take better decisions, not only for their own long-term benefit, but for the economy as a whole.
Last week the government has published its Green Paper on Corporate Governance Reform. If we are to see the changes outlined by the prime minister, does the green paper go far enough and will it help to deliver an economy that works for everyone?
So far the response to the paper has been mixed. Business groups such as the IoD, CBI and British Chamber of Commerce broadly welcomed the proposals, unions decried the absence of worker representation on boards and some commentators expressed concern that the suggested reforms would fail to deliver the promised changes in corporate behaviour.
The paper covers three main areas, executive pay, stakeholder voice and corporate governance. First the positives: a robust governance framework for our large privately owned companies is clearly a good idea. Good governance is about more than just the relationship between an organisation and its owners. All stakeholders have an interest in whether or not a business is well-run, be they employees, customers, suppliers or neighbours. Why should a large private company be absolved from paying due consideration to these different stakeholder groups simply because it is not publicly quoted?

Raising the bar

Non-financial reporting requirements, such as modern slavery statements, are already being applied to companies on the basis of size rather than ownership structure. This is a sensible approach, applying consistent standards to organisations of comparable size and impact. Greater consistency in terms of expectations of governance now needs to be applied if we are to raise the bar and improve standards of corporate behaviour.

The simplest way, as the paper suggests, is to extend the Corporate Governance Code to large private businesses. However repeated corporate scandals within our listed companies would suggest that certain aspects of the code may need to be reviewed and necessary adjustments made for those organisations whose shares are not publicly traded. This could then be applied to all organisations above a certain size, with measures put in place to monitor implementation.
One of its requirements should be that corporates regularly review and assess the impact of their activities on various stakeholder groups, taking into consideration issues such as fair pay, health and safety, supplier payment terms, human rights and compliance. This could be similar to the IFC Performance Standards model, which enables organisations to assess the impact of their activities on stakeholders and to take due consideration in decision making.

 

Board composition

Strengthening stakeholder voice at board level is another key pillar of the green paper, particularly the voices of employees and consumers. Much media coverage has been devoted to reversing the pledge to place employee representatives on boards. This is prevalent in a number of European countries and has been adopted by some UK boards, First Group plc being the most well-known example.
Some form of employee representation at board level is a positive move and GoodCorporation would support the creation of advisory panels to enable directors to hear from employees and other key stakeholders. Another good governance structure would be to require boards to review how their organisation seeks and takes account of the interests of its different stakeholders. This could be done by independent assessment of stakeholder views, which are measured and benchmarked over time to demonstrate levels of engagement.
What the green paper fails to addresses is the problem of board composition. Where boards are made up of like-minded individuals from the same social and professional circles it is likely to engender "group think", with very little in the way of challenge. This is likely to provide insufficient scrutiny or scrutiny from a rather too narrow perspective.
An effective board should reflect the nature of the business and be made up of individuals from a wide social and professional pool who can offer a fresh perspective while also ensuring appropriate representation of the interests of distinct stakeholder groups.
 

 

Publishing pay ratios not enough

It is executive pay, however, that dominates the paper and much of the debate on it. The widening of the country’s pay gap is a real problem, with executive pay quadrupling in less than 20 years, outstripping both profitability and average pay considerably, but there is little here to tackle it.
Much of the emphasis is on shareholder voting rights and powers, all of which have been singularly unsuccessful, with few votes actually overturning pay recommendations. Publishing pay ratios is a simple measure that would at least enable comparisons within the same sector, but they need to be read in context as a high-pay organisations such as Goldman Sachs would have a lower ratio than a retailer such as Waitrose. Strengthening any link with actual, sustained and sustainably strong performance is also welcomed.
The fundamental problem of fairness is not addressed. Executive pay structures need to be simpler and more transparent. Consulting with employees when developing pay policies would be welcome – including recommendations to bring a 360 perspective to the process.
The Brexit vote was, in many ways, a response to globalisation by those that feel it has left them behind. As Theresa May said, we need an economy that works for everyone. To do that we need businesses that reward all staff fairly, not just executives. Good corporate governance needs to consider the wages of those on the shop floor in conjunction with those in the C-suite. The risk otherwise is that feelings of alienation, perceptions of exploitation and an unfair distribution of remuneration will be reflected in greater downward pressure on staff motivation and productivity.
The green paper is a start, but good corporate governance needs to go further.

Michael Littlechild is director of business ethics advisers GoodCorporation.
 

Theresa May  executive pay  corporate government reform  green paper