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Tackling High Pay: Our Verdict on New Corporate Governance Report

Today the Business Select Committee, a cross party group of MPs tasked with examining the policy of the Department of Business, Energy & Industrial Strategy, released a new report on corporate governance reform. 

Corporate governance might not sound catchy, but it has significant real life implications, setting out how companies should run and how they make decisions. If we want to tackle high pay and see businesses run in a responsible, sustainable way, we urgently need to see reform of corporate governance. 

This latest report on corporate governance has a context. The same committee questioned BHS boss Philip Green about a pension scandal last year, and Mike Ashley about exploitative working conditions at Sport Direct. 

With a backdrop of high profile scandals around big businesses exploiting their employees, we’ve also seen top CEO’s salaries sky rocket. On 4 January this year, the average FTSE100 CEO had already made the equivalent of an average UK salary – that’s in just two and a half days. Meanwhile, TUC research shows teachers and midwives will lose more than £3000 by 2020 if government policy on public sector wages continues, and average wages in real terms still haven’t recovered since the financial crash in 2008.

We were pleased to see from this report that tackling high pay is still on the political agenda, and a recognition that overall pay levels have increased so dramatically that there is no credible link between pay and performance. The recommendation that companies should publish pay ratios to show the difference between the earnings of big bosses, middle management and other UK employees is also welcome. 

With public and political pressure building, one top executive at accounting firm PwC noted last year that unless business does something to answer public concerns about high pay, they know it will be taken out of their hands. This report will only add to a growing sense that high pay is out of control. 

It’s also clear from this report that the principle of workers on boards isn’t going away. The report from MPs today recommends that workers should sit on company boards, stating that they bring a fresh perspective and can challenge decision making on remuneration committees – where pay packages for top bosses are approved. However, they stop short of recommending it becomes compulsory for large companies to include a worker on the board. As the TUC noted in their response to today’s report, we won’t see workers on boards become the norm without a legal requirement, and there’s no guarantee a single extra worker will be included on a board while it remains voluntary. 

Theresa May pledged her support for workers on company boards both before and since becoming prime minister, so many were disappointed to see her clarify in a speech last year that the measure would remain voluntary. We’ll have to wait and see if the government offers any new commitments on workers on boards when they respond to the consultation on corporate governance they launched last November. Watch this space for upcoming CLASS research into the role workers on boards could play in tackling excessively high pay. 

Overall, this report should be welcomed for keeping high pay on the political agenda. Now that we’ve heard support for tackling high pay from the prime minister and the cross party business committee, there’s no excuse not to take action. Here at CLASS we’ll be looking out for the government response to their corporate governance consultation, and looking for solid commitments to match their promising rhetoric.