There is practically no detail on what proposals will be included, with one exception: section 439(5) of the Companies Act will be repealed, which effectively paves the way for a binding shareholder vote on future executive pay, one of the Government’s key proposals as set out in its recent consultation. Introducing a binding vote on future pay is a sensible step which the TUC supports. However, unless shareholders exert a much tougher approach to remuneration reports than they have done hitherto, there is a danger that in practice it will have very little impact.

This is why the Government’s other key proposal in its consultation – raising the threshold of support required for remuneration reports to 75% – is so important. Counting the two defeats so far this year, a total of 20 remuneration reports have been defeated at company AGMs since the advisory vote was introduced in 2003, out of literally thousands of votes that have taken place. Had the threshold been 75%, over 85 remuneration reports would have been defeated up to and including 2011 – still a low proportion of the total, but significantly higher than 20 (or 18 as it was at the end of 2011).

There has been much talk recently of a ‘shareholder spring’ (meaning increased levels of shareholder activism), fuelled in particular by the recent defeat of Aviva’s remuneration report at its AGM last Friday. It is great to see shareholders finally flex their muscles a bit on executive pay, but it is premature to read signs of a ‘shareholder spring’ from one AGM defeat.

There have been flurries of shareholder activity on executive pay in the past. Four companies had their remuneration reports defeated at their AGMs in 2005, yet this was followed in 2006 with just one defeat, and in 2007 and 2008 there were no defeats at all. The next peak came post financial-crisis in 2009, which saw the defeat of five remuneration reports; yet this was followed by three defeats in 2010 and three last year. The recent high levels of ‘no’ votes on remuneration and the defeat at Aviva, while welcome, may be more a case of shareholder burps than a shareholder spring.

Average votes against remuneration reports as a whole, while creeping upwards, remain extremely low, rising from 3.3% in 2006 to 6.0% last year. This modest increase covers a period of recession, characterised by poor company performance, low (in some cases negative) levels of shareholder returns and public outrage over executive pay. In this context, an average ‘no’ vote of 6% does not look like the spark needed to set the executive pay bonfires burning.

Several commentators have interpreted Aviva’s remuneration report defeat as a vote of no confidence in its Chief Executive Andrew Moss. Yet, shareholders supported Andrew Moss’s re-election by a margin of over 5:1. Confused? Apparently, the explanation for this seeming contradiction is that shareholders are reluctant to vote against a director (in this case the Chief Executive) because these votes are binding, so they would rather use the currently non-binding remuneration report vote as a means to send a signal of disapproval of the Chief Executive.

This contorted logic is as surreal as it is ridiculous and raises serious questions about whether investors are on the right page when it comes to using their voting rights. It raises particular questions about how the introduction of a binding vote will affect voting behaviour. If this is the logic that informs the way shareholders use their current voting rights at companies, is strengthening their voting rights really the best way to curb excessive executive pay?

Yet what is notable is that despite the media portrayal of angry shareholders, a majority of shareholders did in fact vote in favour of the remuneration reports in question. When abstentions are discounted – and in law abstentions do not count towards the result – 73% of Barclays’ shareholders and 63% of at Xstrata’s shareholders voted in support of the companies’ remuneration reports. While the Aviva board may be expecting to receive a bloody nose on Friday, it is again likely that despite some significant opposition, the remuneration report will be carried.

This is the great contradiction of UK corporate governance: shareholders have considerable powers with which to monitor companies and hold them to account, but are reluctant to use them. This leaves a dangerous vacuum that allows boards to set their own pay more or less as they wish.

This is why the TUC believes that workers should be represented on remuneration committees. We believes that this would bring a much-needed dose of common sense to discussions, and ensure that remuneration committees took account of pay and conditions elsewhere in the company when setting directors’ pay, as they are required to under the Combined Code.

Despite shareholders’ lamentable record of using their existing rights to tackle executive pay (and evidence from other countries that worker representation on remuneration committees helps to curb executive pay), the Government has based most of its proposals for addressing executive pay on strengthening shareholder rights.

However, its recent consultation did recognise the problem of shareholder inaction: ‘the increasingly diverse and fragmented nature of shareholders in the UK means that the likelihood of seeing 50% or more votes cast against any resolution can be reasonably expected to remain extremely low’. And to address this issue, the Government has suggested raising the threshold of support required for remuneration reports to 75%.

There is certainly evidence that this would increase the ’bite’ of shareholder votes on executive pay. While just 18 votes on remuneration reports have been defeated by shareholders at company AGMs since the shareholder vote was introduced in 2003, according to PIRC research 85 companies failed to secure a vote in favour of 75%, 31 of which were in 2011. Going back to the shareholder revolts of the past week, both Barclays and Xstrata would have had their 2012 remuneration reports defeated had the threshold of support required been 75%.

The Government has put shareholders at the centre of their approach to tackling executive pay. Raising the threshold of support to 75% is necessary to make this approach work: without it, there is a danger that the Government’s proposals will have little impact in practice. The Government should either change its approach and recognise the need for workers to be represented on remuneration committees, or hold firm against corporate lobbying and stick to its proposals.

Last week the Government announced its much-trailed policy proposals on executive pay. While some useful reforms were announced, for example requiring total remuneration for each director to be reported as a single figure, it was not the radical overhaul of executive pay that is so clearly needed. Most disappointingly, decisions about executive pay were left in the hands of shareholders, and remuneration committees were left unreformed.

The TUC and others have called for worker representation on remuneration committees, arguing that this would bring a sense of perspective and common sense to decisions on remuneration and crucially would ensure that remuneration committees took account of pay and conditions elsewhere in the company, as they are required to do by the Corporate Governance Code. In the House of Commons last week, Labour MPs repeatedly asked why the Government had not included worker representation on remuneration committees in their proposals for reform. The gist of the Secretary of State’s response was that while worker representation on boards was very desirable, mandating it was not practical. Two reasons were cited for this; firstly, “the question of how to ensure that a worker representative accepts the full legal responsibilities of a director”; and secondly, the challenge of selecting suitable worker representatives in companies that employ large numbers of overseas workers.

In a TUC briefing, the TUC argues that these so-called “practical” objections do not present a significant obstacle to worker representation on remuneration committees and have been significantly over-stated. While the TUC would of course welcome workers becoming full members of boards, workers do not need to be board members to sit on remuneration committees. There are other important company committees that often include both board and non-board members, such as health and safety committees and CSR committees, and there is no reason why remuneration committees likewise could not include both board and non-board members.

Nor would company law need to be amended in order to require worker representation on remuneration committees; indeed, company law does not currently refer to remuneration committees anyway. A simple amendment to the Corporate Governance Code would be sufficient.

As for the point about international representation, there are precedents from established processes such as European Works Councils for selecting workplace representatives from a company’s operations across different countries. Ultimately, however, if a company is listed in the UK and its board is mainly drawn from the UK, it is reasonable to expect it reflect UK-established procedures for executive remuneration.

Without a decisive change to the system of setting executive remuneration, public concern over top pay and distrust of corporate priorities will not go away. Any political respite gained by stripping Fred Goodwin of his peerage is likely to be short-lived.

Why does this matter? Because if more disclosure and more power for shareholders is all that we are going to get from this Government on executive pay, it simply won’t work.

This formula of transparency and empowering shareholders has been at the basis of public policy on executive pay since the mid-1990s. Shareholders have had an advisory vote on executive pay since 2002. Since then, only eighteen remuneration reports have been defeated at company AGMs, a minute fraction of the total number of votes on remuneration that have taken place.

The problem with the current system is not that the votes are not binding, but that too few shareholders vote against remuneration reports. Making shareholder votes binding will not change this; in fact, some investors have said that they would be less likely to vote against a remuneration report if the vote was binding than they are now. Unless shareholders radically change their stance on executive pay, making their votes binding will do nothing to address the problem of soaring executive pay packages and the growing gap between executive pay and that of ordinary workers.

In the same interview, David Cameron expressed doubts about worker representation on remuneration committees. Yet this, where tried in other countries, has been shown to correlate with lower levels of executive pay and a lower probability of stock option plans. This proposal, long promoted by the TUC, has gained widespread support including from the independent High Pay Commission. Workers would bring a fresh perspective and a common sense approach to discussions on remuneration, in contrast to the current culture that presides on remuneration committees. Shareholders have failed to rein in executive pay, and it is time to try something new.

For those with a preference for evidence-based policy making, looking at the UK’s experience to date, shareholder votes alone have not and will not curb executive pay. Looking at experience in other countries, worker representation on remuneration has been shown to curb executive pay. So…

David Cameron’s comments were made in an interview with Andrew Marr, so there may be more to come on this from the Government when it officially responds to its recent consultation exercise on executive remuneration. We hope.

The TUC has been campaigning for worker representation on remuneration committees for over 15 years. There have been times in the past when we have been derided for putting forward a proposal that appeared to go so strongly against the grain of the status quo. It shows that ideas that are far outside the mainstream political discussion can inch slowly inwards and gain real traction over time.

There are many arguments in favour of worker representation on remuneration committees. There is now agreement across the political spectrum that the gap between directors’ rewards and those of ordinary workers has stretched too far. Giving workers a voice on remuneration committees is a direct response to this growing gap and a practical way to make a difference. This is not just as assertion: academic research among the largest 600 European companies has found that presence of board level employee representation is correlated with lower CEO pay and a lower probability of stock option plans.

Remuneration committees are required under the Corporate Governance Combined Code to take into account pay and conditions across the company as a whole, but there is little evidence that this principle is adhered to at present. Bringing workers into remuneration committees would at a stroke boost awareness among remuneration committee members of employee pay rises, pay levels and morale. Worker representation would bring an overdue sense of perspective onto remuneration committees, which has to date been sadly lacking.

As to the practical issues, there are useful precedents from Continental Europe that show how issues such as confidentiality can be addressed.

If worker representation on remuneration committees does become a reality, the TUC will organise training for worker representatives to ensure that they are fully prepared for their important role.

For directors with defined benefit pensions, the average transfer value – the amount that would be taken out of the pension scheme if the director wanted to leave the scheme – is a massive £3.91 million. The average directors’ accrued pension – the amount that would be paid out each year on retirement based on current scheme membership – is £224,121 per year, over 23 times the average occupational pension. What is particularly shocking is that directors are frequently not in the same pension schemes as their own staff, and, despite their higher salaries, their pensions are often set up on much more generous terms.

So, still looking at defined benefit schemes, by far the most common accrual rate (the proportion of pay a person receives as pension for each year they have been in the scheme) for directors is 1/30^ths , whereas accrual rates for employees are generally 1/60^ths, or 1/80^ths . What this means is that directors are accumulating pension entitlements much faster than ordinary workers, as well as benefiting from the fact that their pension will be based on their much higher rates of pay.

Many pension schemes for both private and public sector workers have moved to a normal retirement age or pension age of 65, and the Government has proposed a further extension of the normal pension age for public sector schemes. The most common retirement age for directors, however, is still 60.

Looking at defined contribution schemes, the average contribution rate for directors is 22%. This compares with an average for employees of 6.7%. The minimum employer contribution for employees covered by auto-enrolment will (eventually) be 3%. So, employees are waiting until 2017 until employers will be required to pay a minimum of 3% of pay into their pension schemes, while directors are currently receiving an average of 22% of their much larger pay packages in theirs.

Parts of the media and some business leaders are fond of referring to public sector pension schemes as ‘gold-plated’. In reality, the average (mean) public sector pension is £6,497 per year, making the ratio between average directors’ pension and the average public sector pension 34:1. In Local Government, the median pension is just over £3,000 per year (£3,048 to be precise), just 1/74^th of the average directors’ pension. If this is ‘gold-plated’, what words should be used to describe directors’ pensions? Solid diamond? Or just unfair?

The gulf between the pensions of company directors and the rest of the workforce is the real pensions scandal. The TUC is calling for all directors to be members of the same pension schemes as their staff, on the same terms, and for better disclosure so that it is easier to compare directors’ pension provision with that of their own employees.

The gap between top company directors’ pay and the pay of their own employees (and indeed average earnings in the economy as a whole) has risen inexorably over recent years, despite a provision in the Corporate Governance Code that says that remuneration committees should take into account pay and conditions elsewhere in the company.

The case for addressing company differentials is strong. Academic studies have clearly shown that wide intra-company pay disparities are associated with lower company productivity and/or performance. Add to this the wider economic and social costs of inequality and widespread public unease at the distribution of rewards within companies. Disclosure of pay ratios within companies in remuneration reports is surely an idea whose time has come.

The Labour leader also said that companies should consider having workers on their remuneration committees. The TUC has argued for many years that the presence of worker representatives on remuneration committees would bring a sense of perspective and common sense to proceedings and would ensure that pay for directors was decided in the context of pay throughout the company as a whole. Left as a voluntary initiative, however, this is very unlikely to be put into practice; there is nothing in corporate governance terms that would actually prevent companies from including worker representatives on their remuneration committees now.  But it is a welcome sign that the tide is turning on executive pay that this idea is now being floated by the Labour leader.

The TUC set out the case for disclosure of pay ratios in its response to the Government’s Call for Evidence on Long-termism, due to report in the summer. The High Pay Commission is due to report its proposals for tackling executive pay in the autumn. The case for tackling excessive executive pay has always been strong. It is time to move from concerned hand-wringing to a debate about practical measures that will make a difference. On this front, Ed Miliband has made a good start.

The report also shows that rapid rise in executive pay does not reflect company performance or returns to shareholders: earnings per share actually fell by 1% per year between 1998 and 2009, while earnings of FTSE 100 CEOs rose 6.7% per year over the same period. To sum up: executive pay awards are neither fair nor linked effectively to performance. In other words, the current system is not working.

The HPC report makes a strong case that fairness in pay matters to society and that the exponential growth in executive pay has eroded public trust in companies.  There is less focus on the business case for reform, but the report does quote HPC research with focus groups of employees that suggests that large pay disparities within a company have an impact on employee engagement. Given that employee engagement has been shown to be an important predictor of company productivity and performance, this contributes to an argument that wide pay disparities are bad for company performance.

This is indeed backed up by other academic evidence: different studies have clearly shown that wide inter-company pay disparities are associated with lower company productivity and/or performance. Alongside societal disquiet at pay disparity and the wider economic and social costs of inequality more broadly, this provides a powerful argument for change.

The HPC leaves the million dollar question (excuse the pun) to its final report, which will be published in the autumn: what should be done to reform executive pay? But its analysis of the causes of the problem suggest some clear pointers for reform. As it points out, the attempt to link executive pay to performance has been a major contributor to the massive increase in executive pay over recent years, as ever-higher multiples of ever-higher salaries are tied to ever-more opaque targets set at a level that mean the majority of schemes pay out year after year. We know already both from academic studies and from repeated observation that the attempt to link executive pay to performance has not worked, and in many cases supposedly incentive-related schemes end up paying for poor and mediocre performance .

In addition to this, there is a whole literature on incentives that questions the assumption that performance-related pay will boost performance: on the contrary, studies have shown that trying rewards to performance generally leads to lower performance (for a whole range of reasons including what is called ‘motivation crowding’). Reliance on performance-related pay as the solution to spiralling executive pay has failed, and it is high time that this is recognised and new approaches developed.

The report also discusses board culture and remuneration committees, conflicts of interests and remuneration consultants, the role of shareholders (only a handful of remuneration reports have ever been rejected by shareholders) and how the labour market for top executives fails to operate effectively, all of which have contributed to the problem of spiralling executive pay.

Finally, the report  highlights three areas that it will be looking at for policy proposals: transparency, accountability and fairness. The challenge for the HPC will be to apply these principles to the process and context of setting executive pay to come up with policy recommendations that will really make a difference in practice. A hard task, but one that desperately needs to be done.

From a UK perspective, the inclusion of this last section is interesting, because the concept of ‘comply or explain’ as a means of ‘enforcing’ codes – in other words, either do what the code says or explain why you haven’t – has had a significant role in UK corporate governance since the 1990s. The UK Code of Corporate Governance is ‘enforced’ using comply or explain, and many in the UK see the Code and the flexibility of its enforcement as a strength of the UK system. However, it is also the case that under ‘comply or explain’, some areas of the Corporate Governance Code have simply been flouted, notably the requirement to take into account pay and conditions elsewhere in the group when setting directors’ pay, which is routinely ignored by companies both in terms of compliance and disclosure. Comply or explain does not always work, and it is good to see the European Commission question the extent to which it should be rolled out further within the EU.

On shareholders, the Green Paper picks up many of the themes raised by Sir David Walker in his review of bank governance in the UK, including short-term investor behaviour, the obstacles to investor engagement and conflicts of interests. It asks questions about disclosure of asset managers’ incentive structures, asset manager governance, and whether EU law should require greater disclosure from proxy advisors about their operations. All good questions to ask.

Some of the proposals on boards would have little impact in the UK (eg, a vote on the remuneration report which is already required by UK law), but there is an interesting discussion of the merits of greater board diversity. As well as gender diversity, the paper raises the issue of the range of skills and experience required by boards, noting that boards need experience of ‘the impact of the business on different stakeholders including employees’, which is welcome.

While the Green Paper looks like a useful contribution to the debate about what kind of corporate governance system best supports sustainable companies that can generate sustainable investment returns, how much impact the EU will have on corporate governance in practice remains unclear. Opinion on the value of EU guidelines on corporate governance is split, with a recent survey finding 64% of UK executives are opposed to EU guidelines on corporate governance, while 65% of Continental European executives were in favour (see the FT 4.4.11). Many of the proposals in the Green Paper are very broad and the road to any form of implementation will be a long one. But the Commission is asking the right questions and appears unwilling to go back to ‘business as usual’, which is a good place to start.

There is no mention of plans for Northern Rock or the other state-owned banks, and the opportunity to provide some flesh on the bones of Project Merlin has not been taken, perhaps because there is none to be provided.

While businesses will doubtless support reductions in corporation tax, what companies have been calling out for – especially small and medium sized ones – is better access to credit. This is far more important to enable companies to grow than reductions in corporation tax. And on this the budget was silent.

A major problem with Project Merlin, as has been well-documented by commentators, is that the Government has no way of ensuring that the ‘extra’ credit to be made available to SMEs and other businesses will actually be lent. Another problem is the high rates of interest that many businesses are being charged, at a time when base rates are at an all-time low. There is nothing in Project Merlin or the Budget to improve the terms on which SMEs and other businesses are eligible for loans. There is no mention at all of overdraft facilities, although overdraft lending to small businesses has reduced much more sharply than loan lending has done.

In opposition, George Osborne made numerous self-righteous attacks on the banks, including calling for bankers’ bonuses to be limited to £2,000. As Chancellor, he seems to have decided to ignore his previous strong words and let the banks get back to ‘business as usual’ on their own terms.

The survey shows that who manages your pension makes a huge difference to how your pension fund votes on a range of issues from remuneration through to chicken welfare and labour standards.

At one of the spectrum, a small group of fund managers supported between 70% and 80% of management resolutions, even in this sample of controversial votes. At the other end, a number supported less than 40%.

On directors’ pay, the issue on which investors are most likely to vote against management, a handful of fund manager nonetheless supported over  60% of the remuneration reports covered in the sample. Most supported less than a third.

One question that arises from this is how aware the clients of these fund managers (such as pension funds) are of the voting stances that are being taken on their behalf. Most survey respondents stated that client interest in voting and engagement had risen, with most agreeing that the financial crisis had played a part in this. However, they also said that to date, questions about voting and engagement had rarely been raised in interviews with potential clients.

If you want to see how your pension or insurance policy assets were voted, find out who the scheme fund manager is and have a look at the survey (pdf download), launched at the TUC’s trustee conference taking place at Congress House today.

And in answer to the question about whether your pension fund supported Unite’s resolution on labour standards in its supply chain – probably not, unless your pension fund is managed by CCLA or follows PIRC’s voting recommendations. All the other investors who responded to the TUC’s survey either voted against the resolution or abstained.

The headline policy on corporation tax is the reduction of the main rate from 28% to 24% over the next four years. The Budget does not claim that this will have any impact on growth, but does boast that it ‘will give the UK the lowest rate of corporation tax in the G7’. Is this really a top priority at a time when the Government is trying to save billions of pounds and is cutting the benefits paid to protect the health of pregnant women?

For such tax cuts to be justified, there needs to be a credible argument that cutting corporation tax would feed through into higher economic growth and therefore jobs. However, the international evidence to support this assumption is weak; significantly, none is presented in the Budget at all. In addition, the corporation tax cuts are being funded by reforms to other tax credits and allowances. These include tax credits and allowances that are designed to encourage investment both in capital and R&D, so reducing these in favour of headline tax rate reductions is not likely to encourage growth.

In a budget full of drastic measures cutting the protection offered to vulnerable groups, it was essential that any tax cuts served a wider social and economic purpose such as boosting economic growth or jobs . The cuts to corporation tax rates fail this test and illustrate the Coalition Government’s ideological preference for prioritising profits over people.

If News Corporation’s bid for BSkyB were to go ahead, the resulting concentration of media ownership that the new company would represent would lead to a serious reduction in media plurality, which is a cornerstone of a flourishing democracy. It is would also lead to a substantial reduction in competition in the media sector. The implications for consumers of news and content generally and for other broadcasters  - notably the BBC, which the Murdoch empire continually rails against – look bleak.

The Government should insist that scrutiny of this bid is repatriated from Europe and is undertaken in the UK, as is its right given the impact that it would have on the UK media sector. It is essential that the impact on concentration of media ownership and media plurality in the UK, rather than across the EU as a whole, is fully taken into account in assessing the bid.

This bid will seriously test David Cameron’s commitment to putting the public interest before the interests of his party and its media supporters. It will also test the resolve of Vince Cable and the Lib Dems to stick to their principles in the face of pressure from their Coalition allies. If the Coalition partners fail this test, it is the British public that will pay the price, as the benefits of media diversity are trumped by the interests of party politics.

At present, company directors are drawn from a very narrow range of backgrounds and we believe that the quality of discussion and decision-making on boards would benefit from a wider range of voices being heard in the boardroom.

The TUC has for years called for all non-executive director posts to be publicly advertised, to encourage a wider range of applications to boards. We have also suggested establishing a pool of potential non-executive director candidates drawn from a range of experiences and backgrounds, on which companies could draw.

Another recommendation is that there should be a central site on which all non-executive director posts are advertised and that all nomination committee members should undergo equally opportunities and recruitment training.

So there are things that can be done to tackle this area; we will wait and see what the Government’s proposals will be.

When this was discussed during the passage of the Companies Bill (as it was at the time) through Parliament, it was lobbied against by all the organisations representing asset managers. In the aftermath of the financial crisis and the belated but welcome recognition that there is a public interest in shareholders carrying out their governance role towards companies effectively, it will be interesting to see what stance these organisations take this time around.

The Government also states that it will consult on further measures to ‘facilitate the consent, by owners, of executive remuneration in the financial services sector’. An obvious step would be to make the results of AGM votes on company remuneration reports binding upon companies; at present, the vote is just advisory.

However, ‘shareholder consent’ for excessive pay packages has proved all too easy to achieve in the past; in 2007, before the financial crisis broke, remuneration reports at UK banks achieved the support of over 77% of votes cast. Even in 2009, after the bail-out of the banks, only 36% of votes were cast against bank remuneration reports, considerably lower than the 47.8% cast in favour.

Unless shareholders change the way they assess executive pay packages, obtaining ‘shareholder consent’ is unlikely to act as a dampener on either the levels or rates of increase of executive pay in the financial sector. To address this, it is essential that pension funds and other fund manager clients make it clear they would like to see their fund managers take a much tougher stance on executive pay. For example, we’d like to see the ratio between pay at the top and the bottom of a company form an important part of shareholders’ assessment.

However, if the Government wants to bring about a permanent change in the scale of City bonuses it will need to follow up this one-off tax with stronger, longer-term measures.

The Pre-Budget Report says that the Government’s intention is that in the longer-term remuneration practice will be changed by the corporate governance changes recommended by Sir David Walker in his Review of Bank Governance and measures being introduced in the Financial Services Bill currently passing through Parliament.

However, Sir David Walker’s report specifically ruled out measures to tackle the level of bank bonuses, confining its recommendations to issues surrounding disclosure and better alignment with risk management. Much of the discussion about bank bonuses has been concerned with the relationship between incentives and risk; while this is clearly vitally important, it is not the only issue of concern, and the public are rightly outraged by the level of remuneration in a sector that has caused such damage to the rest of the economy.

The 50% bank bonus tax should be the first step of a series of measures to bring about a permanent adjustment in top City pay to bring it more in line with earnings in the rest of the economy.

In the UK, shareholders have a key role in corporate governance.  Key areas, from directors’ pay to decisions about mergers and acquisitions, are left to shareholder rather than regulatory approval.  This is based on the assumption that shareholder interests are aligned with the long-term success of the company and the term interests of other key stakeholders such as employees and suppliers.  It assumes that shareholders have the ability and the incentives to act responsibly in relation to the companies whose shares they hold.

In reality, a declining proportion of the shares of UK companies are held by UK long-term shareholders – down from 52% in 1990 to just 27% in 2006, according to ONS data.  Shareholders whose strategies are based primarily on short-term share trading rather than long-term share ownership have neither the motivation nor in all likelihood the capability to carry out responsible engagement with companies. In some cases, such as when shares are subject to short-selling or an investor has taken a ‘short’ position on a company’s shares, the shareholder may actually benefit from a company’s poor performance. Such shareholders should play no role in that company’s governance.

So what can be done?  In our response to the Walker Review, the TUC has called for measures to distinguish between long-term and short-term shareholders in terms of their corporate governance role.  Measures could include making right to vote shares conditional on a minimum ownership period, or increasing the voting power of a share according to the length of ownership. We also call for measures to boost long-term share ownership, such as increasing stamp duty on share transactions.

In addition, the TUC has always supported a different model of corporate governance that would require directors to balance the interests of different groups with a stake in the company, including employees and suppliers. We would like proper consideration – not the one-line dismissal it is accorded in the Walker review – given to the Continental two-tier board system, which in some instances includes employee representation on a supervisory board.

We need a far-reaching public debate about how to improve corporate governance and shareholder engagement, but the starting point must be – ‘it’s broken, so fix it’.

PIRC recognises that alongside a catastrophic failure of financial regulation, the financial crisis represents a failure of corporate governance, and its analysis makes a welcome change from the focus on the (admittedly very important) issues of credit, liquidity and financing that have dominated the pages of the Financial Times and other broadsheets in their analysis of the crisis.

The PIRC manifesto sets out suggestions for both policy changes and areas for further research, including establishing a new governance and ownership arm within the FSA, a new fiduciary law enshrining investors’ stewardship role, mandatory disclosure of shareholder voting records by investors (a long-standing TUC policy aim), enhanced disclosure of pay and benefits, including information on employees’ pay within companies (ditto) and a levy on hedge funds that use shorting to fund research into its effects. PIRC’s suggestion that the UK should seriously consider the idea of employee representation within the governance structures of listed companies will be of particular interest to employees and trade unions.

There is much to debate here (for example, is the FSA rather than the Financial Reporting Council the best place to host a beefed up corporate governance regulatory oversight function?) but these are debates that need to take place, and need to take place now before the will to learn the lessons of the crisis is gone. It is essential that policy makers recognise the central role of corporate governance failures in the current crisis and take steps to address the existing weaknesses in our system; corporate governance is too important to be left to the wonks.

So far, however, there is little talk of wider action on short-selling, either by regulators or pension funds, and it seems clear that shorting is not going to exit the stock-trading stage quietly.  The Head of Public Relations at Watson Wyatt, while recognising the need for the ban as a short-term measure, added “…it will be good to see this decision reviewed as soon as possible to give back to skilled investment managers their full suite of tools with which to generate returns and control risk for institutional investors”.  Oh – so that’s what short-sellers are doing when they aren’t destroying major financial institutions?

While speculation on share prices is as old as the stock market, borrowing stock you don’t own to make a bet on its share price going down pits your interests as a shareholder directly against that of the company whose shares you have borrowed.  This makes a mockery of the corporate governance system in the UK, which requires directors to serve shareholder interests and makes company directors accountable to shareholders.  How can a board of directors serve shareholders who stand to gain from destroying their company’s share price?  And how can the responsibilities of share ownership be exercised by those who ultimately see themselves as traders rather than long-term owners?

Time for a rethink?