Introducing the Government’s much-anticipated Green Paper on the reform of corporate governance, Prime Minister Theresa May was moved to repeat the words she uttered upon her entry into No 10 Downing Street.
“The Government will build an economy that works for everyone, not just the privileged few,” she wrote. Ms May went on to state her strong belief in the power of businesses and markets to drive prosperity while at the same time accepting that reform is necessary to restore the faith of a public which is rapidly losing faith in both.
In part that is because, as the paper recognises, the growth in executive pay has far outstripped the growth in salaries of those further down. The average FTSE 100 chief executive was paid £1m in 1998, which rose to £4.3m in 2015 despite scant evidence of any corresponding improvement in corporate performance or long-term value.
Ms May has already done away with a proposal that might have seen workers’ representatives appointed to boards, something that is commonplace and uncontroversial in continental Europe. However, some of the ideas contained within the paper have created sufficient consternation among those parts of the corporate lobby that have set themselves in opposition to any change at all to suggest that it may be on the right track.
One of those is a proposal to require companies to publish pay ratios that would show the gap between the pay of the chief executive and that of the average worker. While this is something of a blunt instrument – it would, after all, make Goldman Sachs, with its glut of high-paid workers, look more equitable than John Lewis, which already sets a pay ratio for its relatively modestly paid executives – it is not without merit. It might make remuneration committees think more carefully before passing bloated pay packages if they had to be justified by dint of their comparison to the pay of a company’s workers.
The suggestion that remuneration committees might have to look workers’ representatives in the eye and explain the rationale behind some of the more excessive awards they have made could also pay dividends.
Remuneration committees are typically drawn from the business elite. Their members are typically serving executives, former executives or senior consultants who are well rewarded for their work and have little interest in reform. They take advice from remuneration consultants who have even less motivation to rock the boat given where their fees come from. The requirement to take advice from ordinary employees might be illuminating for them.
However, the majority of the paper’s proposals are focused on giving more power to shareholders, which, in practice, means institutional shareholders. The suggestion of a binding annual vote, the creation of “shareholder committees”, and even allowing shareholders to set an upper limit for pay are all worthy ideas.
The trouble is that the City’s institutions have a lamentable record when it comes to using the tools they already have in their armoury. It speaks volumes that since the last set of reforms were adopted in 2013, just four FTSE 100 companies, two “small cap” companies and no members of the second tier FTSE 250 have lost a non-binding annual vote on a remuneration report.
While certain institutional fund managers have taken up the activist baton, they are still too few in number to effect meaningful reform.
There is little point in legislating to give shareholders powers if they fail to use them. The paper does contain a suggestion that the disclosure of their voting records be made mandatory. That might encourage a few of them to more regularly exercise their franchise. However, given their role in stewarding a large proportion nation’s savings, it is high time for the Government to ask them some rather more searching questions.
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