Green Paper is a missed opportunity to create a Corporate Governance system that works for everyone
On other issues, it includes a few sensible suggestions, but these are wedged between others that would make little or no difference to the status quo.
Given the expectations that have been raised by the PM’s repeated promises to put workers on boards and the increasingly broad consensus that significant reform is needed, this is a missed opportunity to create a corporate governance system that works for everyone and is fit for the 21st Century.
Workers on boards
The Green Paper has a section on strengthening the employee, customer and wider stakeholder voice. There are two main options proposed for putting this into practice: creating stakeholder advisory panels and designating non-executive directors to ‘provide an independent and clear voice for key interested groups’.
The TUC will continue to press the government to deliver on the Prime Minister’s repeated promise to have workers represented on company boards. By which we mean workers, elected by other workers, sitting on company boards. We don’t mean people who are not workers, chosen by people who are not workers, speaking on behalf of workers, sitting on company boards. And we don’t mean workers sitting on advisory committees either.
The main thrust of the executive pay proposals is strengthening the existing framework of shareholder voting rights and disclosure. This is a shame, as there is a growing consensus that a more radical rethink is necessary, in particular in relation to incentive-related pay. But a few more interesting ideas have slipped in too.
The centrepiece of the proposals – in terms of spin if not substance – is to turn the current advisory vote on the remuneration report into a binding vote. Given that only three remuneration reports were defeated in this year’s AGM season, this is unlikely to make much difference.
There is increasing agreement that the current model of incentive-related pay is flawed and the Green Paper has wasted an opportunity to call for a radical rethink, in particular in relation to long-term incentive plans or LTIPs. Given that LTIPs have grown much faster than any other element of directors’ pay (far outstripping any possible measure of company performance), reforming LTIPs is essential to address the issue of ‘quantum’ and the growing gap between executive pay and the pay of ordinary workers. The Green Paper does hint at reform, and includes a question on whether ‘restricted shares’ should replace LTIPs. Restricted shares have their own problems and the TUC continues to argue that all bonus schemes should be open to all staff on the same terms. But reform to LTIPs is long-overdue and perhaps there is now an opportunity for all those who are concerned about their use to coalesce around proposals for reform.
Other interesting proposals on executive pay include: mandatory disclosure of fund managers’ voting records at AGMs (something the TUC campaigned on over many years); facilitating ways to enable retail investors to use their voting rights; and requiring the remuneration committee to consult with the company’s workforce. Finally, the brightest spot is the proposal for mandatory disclosure of pay ratios.
Taking its cue from the collapse of BHS, the Green Paper includes a section on corporate governance in large private companies. It is welcome that the government has recognised that there is a problem in this area, but Green Paper’s ideas for how to address it are somewhat under-whelming. The main proposals are: extending the UK Corporate Governance Code to large private companies; developing a code aimed specifically at private companies; and extending the reporting requirements of private companies.
The TUC has for many years argued for the extension of reporting requirements to large private companies and this would be a welcome development. And there may also be merit in drawing up a corporate governance code for private companies. But the key question is how compliance with that code would be monitored and enforced in a context where the share owners and company directors are one and the same? The Green Paper offers no thoughts on this, but, without some kind of enforcement mechanism, voluntary codes will not prevent a future BHS.