3 Key Points on the Corporate Governance Green Paper
Yesterday, the government released a new green paper on corporate governance. Here are three key things that stood out to me while reading this paper (and it’s worth noting that in the time it took to do so, the average FTSE 100 CEO made over £500)…
1. Something good could, theoretically, come of this green paper.
While the paper is given a broad heading of corporate governance, there is a clear focus on executive pay and performance. The questions being asked here are whether shareholders need new powers to hold companies to account on pay, if more could be done to encourage investors to use new or existing powers on pay, and an invitation to present ideas for a new published pay ratio.
Certainly these measures would be popular, and could go some way to tackling pay inequalities. However, high pay has been growing exponentially for years – from 2015 to 2016 the average pay of FTSE 100 CEOs increased by 10% to £5.48million. To put the brakes on now, we need an ambitious and multi-level effort.
The big caveat here is that any one of these measures on its own would fail to address pay inequalities, or could have unintended consequences. While a published pay ratio might seem a good idea, we should also be aware of evidence demonstrating that publishing pay actually makes companies more competitive, and CEOs ask for more. Then the question of political comes into the equation (see point 3).
2. There’s not enough long term focus.
One of the reasons that employees on boards is being talked about is that there’s an issue with short term decision making in our biggest companies, and relying on shareholders to make decisions for the long term interest of companies doesn’t necessarily work. While historically more individuals were likely to own smaller shares, and thus take a longer term interest in decision making, shareholders now are more likely to be large hedge funds or other large companies, sometimes based abroad, who are not investing for the long term: they’re there to make a profit.
Employees have a natural investment in the company they work for, and having an employee voice on boards was intended to ensure that not only is there a workers voice at the top, but that strategic decisions were focused on the future.
In 2011 Vince Cable, then Lib Dem Business Secretary in the coalition government, released a discussion paper on executive remuneration. The very first question of the paper was “Do UK boards have a long-term focus – if not, why not?” By way of contrast, the only mentions of encouraging long term decision making in this green paper are the questions on incentive plans, and a question about raising the minimum holding period for executive share options from three to five years. Unfortunately, this points to a surface-level interest in corporate governance reform, and is another sign that the green paper is more about generating friendly headlines than real reform.
3. These nice ideas seem unlikely to happen.
Five years ago, then Business Secretary Vince Cable’s discussion paper on executive remuneration was lobbied out of existence. Has anything changed?
As many will already know, Theresa May shocked everyone by announcing that she would like to see employees on company boards during her speech to Conservative party conference in October. However, last week May backtracked saying that this was likely to be a voluntary measure. This means that even if comprehensive proposals are put into place, they will have no teeth.
After Theresa May backed down on this, can we expect any substantive proposals to reform corporate governance? Looking back further, the Conservatives have a bad record on tackling high pay – previous Conservative Chancellor George Osborne took the European Commission to court to try and stop EU caps on banker’s bonuses. Add to this ongoing business uncertainty over Brexit, and real action on high pay looks even more uncertain.
My prediction is that, unfortunately, we’ll be here again in another five years with the same problems, analysing another consultation document for reforming corporate governance and tackling high pay.