From the TUC

Stripping Fred Goodwin of his peerage is no substitute for tackling excessive executive pay and reforming the financial sector

02 Feb 2012, by in Economics

Yesterday’s papers were full of the news that Fred Goodwin has been stripped of his knighthood awarded in 2004 for “services to banking”. However pleasing this may be, it is no substitute for taking effective action to tackle excessive executive pay and reform the financial sector so that it serves the needs of the real economy rather than itself and its top earners. The key issues here are not the bonuses or peerages of a few individuals, however much these might rankle; tackle these in isolation, and they will simply be replaced by the next ‘pariah’. What we need is wholesale reform of the system of setting executive pay, to bring an end to directors’ remuneration rising year upon year in relation to the pay of ordinary workers within the same companies and across the wider economy. This is currently happening throughout the corporate sector as a whole, and not just at RBS.

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.