Worker directors – we’ve been here before

At the UK’s Conservative Party conference, in early October 2016, the Prime Minister, Mrs. Theresa May, raised some significant corporate governance issues:

‘So if you’re a boss who earns a fortune but doesn’t look after your staff, an international company that treats the tax laws as an optional extra…a director who takes out massive dividends while knowing that the company pension scheme is about to go bust, I’m putting you on warning…’

Each of these issues has been discussed in recent blogs. But she also suggested that workers should be appointed to boards of directors. As could be predicted, this suggestion was welcomed by the Trades Union Council but raised alarm in some British boardrooms.

But we have been here before. Extracts from Corporate Governance: Principles, Policies, and Practices (3rd ed., 2015, pages 12 and 85) explain why:

 ‘In the 1970s, the European Economic Community (EEC), now the European Union, issued a series of draft directives on the harmonization of company law throughout the member states. The Draft Fifth Directive (1972) proposed that all large companies in the EEC should adopt the two-tier board form of governance, with both executive and supervisory boards. In other words, the two-tier board form of governance practised in Germany and Holland, would replace the British model of the unitary board, in which both executive and outside directors oversee management and are responsible for seeing that the business is being well run and run in the right direction.

In the two-tier form of governance, companies have two distinct boards, with no common membership. The upper, supervisory board monitors and oversees the work of the executive or management board, which runs the business. The supervisory board has the power to hire and fire the members of the executive board.

Moreover, in addition to the separation of powers, the draft directive included employee representatives on the supervisory board. In the German supervisory board, one half of the members represent the shareholders. The other half are chosen under the co-determination laws through the employees’ trades’ union processes. This reflects the German belief in co-determination, in which companies are seen as social partnerships between capital and labour.

The UK’s response was a Committee chaired by Sir Alan Bullock (later Lord Bullock), the renowned historian and Master of Saint Catherine’s College, Oxford. His report – Industrial Democracy (1977) – and its research papers (1976) were the first serious corporate governance study in Britain, although the phrase ‘corporate governance’ was not then in use. The Committee proposed that the British unitary board be maintained, but that some employee directors be added to the board to represent worker interests.

The Bullock proposals were not well received in Britain’s boardrooms. The unitary board was seen, at least by directors, as a viable system of corporate governance. Workers had no place in the boardroom, they felt. A gradual move towards industrial democracy through participation below board level was preferable.

Neither the EEC’s proposal for supervisory boards nor worker directors became law in the UK. Since then, the company law harmonization process in the EU has been overtaken by social legislation, including the requirement that all major firms should have a works council through which employees can participate in significant strategic developments and changes in corporate policy.’

Proponents of industrial democracy still argue that governing a major company requires an informal partnership between labour and capital, so employees should participate in corporate governance. Maybe an extension of the Shareholder Senate idea, suggested in a recent blog, called a Stakeholder Senate could provide another forum to inform, liaise with, and influence the board.

Bob Tricker October 2016



BHS – an ongoing corporate governance classic

On Sunday 29 August 2016, BHS (British Home Stores) closed the last of its 164 remaining stores, making around 11,000 employees redundant and jeopardizing the future of over 20,000 pensioners. The media took delight, at the same time, in showing the previous owner of BHS, Sir Philip Green, sailing around the Mediterranean on Lionheart, his new $100 million luxury yacht.

 The business of BHS

BHS was a department store business, with over 150 shops around the UK and others abroad. These stores sold a wide range of merchandise relatively cheaply–women, men, and children’s clothing; furniture and household goods; garden equipment; fashion accessories; toys, cameras, and wide range of other goods. Many also had a restaurant. In its heyday, BHS had a store on the high street of the most important towns in Britain.

But in recent years, high street shopping has been challenged by shopping malls, where specialist stores offered wider ranges of specific goods and, of increasing importance, free parking. Internet shopping then developed, bringing further challenges to department stores.The retail industry underwent a period of rapid challenges and growing competitiveness. BHS reflected a by-gone shopping era.

 Arcadia Group Ltd.

Founded in 1928, BHS traded successfully and grew around Britain for generations before being acquired by the Arcadia Group Ltd, an investment company running a network of subsidiary companies mainly in clothes retailing under the brand names of Topshop, Topman, Dorothy Perkins, Burtons Menswear, Wallis, Evans, Miss Selfridge, and Outfit. Arcadia had over 3,000 retail outlets and nearly 7 million square feet of space. The Arcadia accounts list seventy-seven wholly owned subsidiaries, some of them with their own chain of subsidiaries.

In 2014/15, the Arcadia Group turnover was £2,069 million, giving it an operating profit of £229 million. However, exceptional costs including pre-opening costs of overseas stores and pension fund adjustments, and a loss on the disposal of BHS (£311 million) led to an overall loss of £94 million. The 2014/15 accounts note that the UK Pensions Regulator was seeking information from the company in connection with the BHS pension schemes.

Arcadia Group Ltd is wholly owned by Taveta Investments (No.2) Ltd., the first link in a network of trusts and companies, with many registered in Jersey, a Channel Islands tax haven. The Arcadia Group is dominated by Sir Philip Green and its major shareholder, allegedly, is Green’s wife, Lady Tina Green, who is a British-born South African resident in Monaco, a Mediterranean tax haven. Neither Green nor his wife is now on the Arcadia board of directors. Green resigned from the board on 15 December 2015. Lord Grabiner QC also resigned from the Arcadia board on that day.

The Arcadia accounts and annual return for 2014/15, filed with the UK Companies’ Registry, show the Arcadia directors as:

Paul Budge,  Finance Director

Richard Burchill, Accountant (appointed 15 December 2015)

Ian Grabiner, Company Director

Gillian Hague, Group Financial Controller (appointed 15 September 2015)

Christopher Harris,  Company Director

Richard de Dombal (appointed 15 December 2015)

Directors’ remuneration for 2014/15 was £5,271,000, with the highest paid director receiving £1,955,000 (supposedly Ian Grabiner, who is said to be Green’s right-hand man).

Carmen Ltd, a property company owned by the Green family, received over £10 million in rent on BHS stores in 2014/15; and a further £20 million was paid to the family by BHS to repay loans.

PriceWaterhouseCoopers LLP are the Arcadia Group auditors. The 2014/15 accounts show audit fees for the Group and subsidiaries of £355,000 plus fees for non-audit services of £1,798,000 (including £1,151 million for ‘pension advisory services’).

Sir Philip Green

Green is a flamboyant and confrontational billionaire. Many reporters have experienced his explosive temper. He is not one to give interviews. So he was unlikely to provide information to your case writer, who has relied on company accounts, published reports, and newspaper commentary.

Over the years, Green built up a network of retail stores within the Arcadia Group, principally in clothing, both in Britain and abroad, through acquisition, merger, and re-structuring. He received his knighthood for contributions to retailing.

Green and his family own and dominate Arcadia Group, including BHS until its sale. Therefore, Green felt that Bhs was his own company: so he and his family were entitled to pay themselves substantial dividends and fees. He is reported to have said; ‘It’s my money, I can do what I like with it.’

The sale and collapse of BHS

However, BHS had made losses for the past seven years, which had to be funded by the Arcadia Group. In other words, Green family interests had funded BHS losses. But BHS was a private company. Corporate governance codes that cover public companies did not apply to BHS.

By 2015, BHS was struggling. In March 2015, the company was sold for a nominal £1 to Retail Acquisitions Ltd., a company owned by Dominic Chapell, a three times bankrupt former racing driver. The sale to Retail Acquisitions was negotiated by bankers Goldman Sachs.

According to the Guardian newspaper, Arcadia insisted on three protective covenants before selling BHS:

  1. All monies available to BHS at the time of sale shall be used for the day-to-day running of BHS.
  2. All proceeds realised from the sale of BHS properties shall be used to operate BHS as a going concern and to pay its debts.
  3. No steps are to be taken by the buyer that would adversely affect the ability of BHS to continue as a going concern.

Finance Director Budge explained that this was to ensure that all monies available to BHS should be used for that company’s business and not drawn down by the new owners.

The financial impacts of the BHS sale are clear in the Arcadia accounts for 2014/15. £216 million due to Arcadia Group Ltd were waived. Provisions relating to BHS disposal and cash transferred by Arcadia to BHS cost £88 million. The cash costs of the BHS disposal came to £2.3 million.

Administrators Duff and Phelps were appointed to administer BHS in April 2016. Unable to find a buyer, the closure of its stores followed in August, 2016.

The pension fund deficit

The deficit in the BHS pension fund was initially reported as being around £570 million. The stock market crisis in 2008 had reduced the fund’s value and subsequent losses at BHS had prevented funding the short-fall. In evidence to Members of Parliament, Chappell alleged that Green made a condition of any deal not to contact the Pensions Regulator.

The UK’s Pension Protection Fund can contribute to failed pension funds, but BHS pensioners would probably face reduced benefits. The UK’s Pensions Regulator has powers to call on Arcadia to contribute to the BHS pension fund deficit either through a financial support direction or a contribution notice. Green has claimed that he was ‘being tortured by the Regulator.’

 Green is reported to have made an informal offer of a £300 million contribution to the pension fund but only on condition that investigations against him be stopped and any legal action against him or his wife would be dropped.

Parliamentary probe into BHS sale

Members of Parliament from the Works and Pensions, and Business Innovation and Skills select committees called on evidence to probe the BHS collapse. The Chairman of the Works and Pensions Select committee, Frank Fields, suggested that Green, himself, should fund the deficit or risk losing his knighthood. Green responded aggressively claiming that he had offered to support the pension fund but his offer had been rejected. He also suggested that the Chairman, Field, was biased against him.

In his defence, Green said: ‘Any fair review of the BHS balance sheet would show the support we had provided to the BHS business throughout; It is clear that we invested substantially in the business. We lent substantial sums to the business and we gave Retail Acquisitions every chance, with a solid platform to take the business forward’.

The Chairman of the BHS pension fund trustees, Chris Martin, told the MPs that he had raised concerns about the deficit in the BHS pension fund after meeting Chappell. He felt that Retail Acquisitions had done little due diligence during their acquisition.

Business Select Committee member, Richard Fuller, called for an investigation by the Financial Reporting Council (FRC) of the conduct of directors and professional advisers involved. The FRC launched a probe into the involvement of BHS auditor one of the Big Four audit firms, PriceWaterhouseCoopers (PwC).

MPs called for Lady Tina Green to shed light on the complex web of companies registered in her name in tax havens, and their profits. They also wanted to know more about the relationship between Green and Goldman Sachs.

More critical comments

The Institute of Directors (IOD) commented that the action of Green ‘has the potential to be deeply damaging to British business. We spend a lot of time agonizing over the loss of trust in the business community and I think we can see why…When someone ends up behaving like this people think that is how business is: and it is not’.

The IOD also called on the UK’s Financial Reporting Council to investigate whether the board of Arcadia Group had failed in its duty to promote the success of a company it owned.

The Daily Mail said that Green had ‘obfuscated and dodged questions about the liabilities when he sold BHS to a former bankrupt, using a front page banner headline: ‘STRIP SIR SHIFTY OF HIS TITLE.’

Lord Myners, a corporate governance stalwart, asked the Attorney General whether the Serious Fraud Office was considering a formal criminal investigation into the collapse of BHS.

Although the SFO, the FRC, the Pensions Regulator and the administrator/liquidator have yet to report, the BHS case seems set to become a corporate governance classic. One is reminded of the Robert Maxwell case (page 25-26, Corporate Governance 3e, Tricker). Maxwell, a dominant entrepreneur, used funds from two public companies and their staff pension funds to prop up his private interests. Maxwell’s business empire finally collapsed leaving a £753 million deficit. He died of a heart attack having fallen from his yacht in the Mediterranean. But Maxwell had taken monies from two listed public companies, and their pension funds. BHS was a private company predominantly owned by the Green family.


Discussion questions

  1. Was anything wrong with the governance of BHS? This was a private company, wholly owned by another private company, itself in a network of overseas trusts and holding companies. No public company was involved.
  2. Should there be a corporate governance code for significant private companies, say those with sales revenues or employees over a certain figure? Should such significant private companies be required to have independent, non-executive (outside) directors or explain why they do not? Should they have audit committees, remunerations committees, and nomination committees with independent directors? Should the chairmanship of the board be separate form the CEO?
  3. Should independent auditors provide non-audit services and advice to their audit clients? (PWC were paid £355,000 in audit fees plus fees for non-audit services of £1,798,000).
  4. The UK Companies’ Act 2006 applies to all limited liability companies in the UK–public and private. It, therefore, applied to the Arcadia Group Ltd and to BHS Ltd. The Companies Act specifically spells out a statutory duty to recognise the effect of board decisions on a wider public, including ‘the interests of the company’s employees’, and ‘the need to foster the company’s business relations with suppliers, customers and others’. Did the decisions that led to the liquidation of BHS meet these requirements? If not, how might the Act be enforced?

A new idea in corporate governance – Shareholder Senates

Around twenty years ago I wrote that while the twentieth century had been the era of management, with its new management schools, management consultants, and management gurus, the twenty-first century would be the era of corporate governance.   Corporate governance has certainly now moved centre stage. Google has 52 million references to the phrase.

Interest in corporate governance has flourished. The late Sir Adrian Cadbury wrote the first corporate governance code – the UK’s Financial Aspects of Corporate Governance (1992).  He always emphasized that his report was not a comprehensive approach to corporate governance, but focused on the financial aspects. Nevertheless, he made proposals that are still pertinent ̶ the creation of board level audit committees, remuneration committees, and nomination committees, with independent outside directors; the separation of the board chairman from the CEO; and public reporting that the company had complied with the code or explaining why it had not.

Since then, corporate governance codes, often as stock exchange requirements, cover almost all listed companies around the world. But despite countless amendments, revisions, and rewrites most corporate governance development has been piecemeal. There has been relatively little original thinking. Most codes still adopt Cadbury’s voluntary ‘comply or explain’ approach. The principle exception is in the United States, where regulation and legislation are used to oversee the governance of corporations.

The development of corporate governance practice has almost always been in response to corporate failure or economic malaise. In the United States, the Securities and Exchange Commission (SEC) was set up in 1932–3, after the stock market crash of 1929 and the great depression that followed. The Cadbury report responded to concerns about corruption found in UK Government inspectors’ reports on failed companies including the collapse of Robert Maxwell’s’ corporate empire.

The US Sarbanes-Oxley Act (SOX 2002), was a response to the failure of Enron, Waste Management, and other companies, followed by the folding of the ‘Big Five’ accounting firm, Arthur Andersen, reducing the big five to the even bigger four. Unfortunately, SOX did not prevent the global financial crisis, starting around 2008, in which US companies such as Lehman Brothers failed and American International Group, Fannie Mae, Freddie Mac, and others were bailed-out by the US government. The result was further federal legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, called by some SOX 2, attempted to improve American financial regulation and the governance of the US financial services industry.

As yet, no over-arching theory of corporate governance has emerged. New thinking and new ideas are badly needed in the governance of organizations. A fundamental governance question for the modern public company, for example, is: What role should the shareholders play in corporate governance?

In the original mid-nineteenth model of the joint-stock limited liability company, the shareholders were mostly individuals–aristocrats and members of the newly forming affluent middle class. These shareholders appointed the directors who reported to them on their stewardship of the company. The directors may have known their shareholders personally. Shareholder meetings and votes were the way boards of directors were held to account. Indeed, in the original model accounts were audited by an audit committee, elected from among the shareholders themselves.

But today, individuals running their own portfolios form only a small part of the shareholder base. These ‘retail shareholders’ typically have relatively small holdings and little influence. They might also include directors, executives, and other employees of the company.

Significant shareholders are more likely to be:

  • active institutional investors, such as mutual funds, pension funds, and financial institutions, closely interested in the company’s affairs who may be actively involved in corporate governance matters; and
  • passive institutional investors, such as index-tracking funds required by their constitutions to invest in a given range of securities, using computer algorithms to make investment decisions, with little interest in corporate governance issues. The shareholder base could also include:
        • hedge funds gambling against the market and selling short, with real short-term interests in the business, but not in longer-term corporate governance;
        • private equity investors seeking short term strategic opportunities;
        • dominant investors, perhaps the company’s founders or their family trusts, who are closely interested in, and possibly actively involved in company affairs. Though they might hold only a minority of the voting equity, in some jurisdictions they can maintain ownership power through dual-class shares;
        • state-owned corporations, perhaps with a minority of their shares traded publically, and possibly influenced by state economic and political interests; and
        • sovereign funds, using state capital to invest, possibly with political or economic implications as well as financial interests.Concerns over corporate behaviour, such as allegedly excessive director remuneration, unclear or over-ambitious corporate strategies, or the lack of board diversity have led some politicians and other commentators to call for shareholders to exercise their duty to oversee board behaviour more fully. This has led to the emergence of proxy advisers; firms that study issues facing companies and advise institutional investors on voting decisions.

But votes in shareholder meetings are advisory; exhortatory at best. Shareholders’ votes do not bind the board. Directors do not have to follow them. Energetic efforts by some institutional investors, including grouping together, have not changed the underlying power structure.

Bob Monks, in his book Corpocracy (New York: Wiley, 2007), showed how power had moved over the years from owners to directors. Concerned by what he saw as an abuse of power, he co-founded Institutional Shareholder Services (ISS) in 1985 to wage proxy warfare on companies. These proxy battles continue to this day. However, the fundamental question remains: In the modern public company what should the role of shareholders be?

Is it, on the one hand, to preserve the nineteenth-century legal concept of the corporation–that the shareholders own the company and are expected to play a basic role in its governance by electing the directors and holding them to account. Or is it, on the other hand, for the shareholders to accept a corporate stakeholder role providing finance, just as suppliers provide goods and services, customers produce sales revenues, and the employees provide the work force?

I have just completed a study on shareholder communication for the Hong Kong Institute of Chartered Secretaries, which will be published shortly and duly noted in this blog. In a survey Hong Kong’s listed companies gave overwhelming support for the idea that shareholders should exercise a stewardship role in the governance of listed companies. In this they are in line with the opinions of many authorities around the world–regulators, legislators, and corporate governance commentators.

Had the alternative view been taken, that shareholders are just one of the various stakeholders in a corporation, appropriate governance models could be developed. The German supervisory level two-tier board could provide a start; members are nominated to represent both labour and capital (the employees and the investors). Representatives of other stakeholders could be added.

Such a development would reflect a change in the UK Companies’ law in 2006. Prior to that company law in the UK required directors to act in the best interests of the company, which effectively meant in the interest of the shareholders, in other words, by attempting to maximize shareholder value in the long term. But the Companies Act 2006 specifically spelled out a statutory duty to recognize the effect of board decisions on a wider public. For the first time in UK company law, corporate social responsibility (CSR) responsibilities were included among the formal duties of company directors:

‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:

(a) the likely consequences of any decision in the long term

(b) the interests of the company’s employees

(c) the need to foster the company’s business relations with suppliers, customers, and others

(d) the impact of the company’s operations on the community and the environment

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.’

Thus UK company law now requires companies to consider employees, suppliers, customers, and other business partners, as well as the community and the environment, in their decisions.

However, if shareholders are to continue to be a responsible part of the corporate governance mechanism, how might that be achieved? If shareholders are really to affect corporate governance in the companies in which they invest, they need more power. New corporate governance models will have to be devised. One idea might be a Shareholder Senate.

Shareholder Senates

A Shareholder Senate would be a new governance body set mid-way between the company and the body of shareholders. Members of the Senate would be nominated by long-term institutional investors and elected by all the shareholders.

The Senate would meet formally with the board’s remuneration committee, its nomination committee, and its audit committee with the auditors. Periodically, it would have discussions with the Chairman and the entire board. It would also meet independently to formulate reports and make recommendations to shareholders.

The overall responsibility for the company and its management would remain with the board of directors. The Senate would have the authority to question, to advise, and to influence the company on its strategies, operational performance, and financial matters. For example, a Senate could question and challenge levels and methods of executive remuneration, the adequacy of risk assessment systems, the balance of skills, experience, and adequacy of the directors, and confirm that succession plans existed for all senior executives.

The Senate would not have the power to block the board’s decisions, nor could it hire and fire directors (as the German supervisory board can). But it would have the responsibility to liaise with the shareholders, and the power to recommend how they vote on specific motions. It could also introduce motions for shareholder meetings. Over time, Shareholder Senates would supplement and probably replace the work of proxy advisers.

Shareholder Senates would become a fundamental component of companies’ corporate governance structures and processes. Accordingly, members of the Senate would have fees and expenses reimbursed by the company, just as non-executive, outside directors have. The company would be responsible for publishing Senate reports and other communications with investors, just as it publishes other corporate reports.

Concern might be expressed that members of Shareholder Senates would receive unfair insider information. But Senate members could be placed in a similar position to directors who may not trade shares prior to the announcement of results. In fact, Senate members would be in a less exposed position than a nominee director elected by a major shareholder, because they would not attend board deliberations.

In fact, it would not be difficult to introduce a requirement for shareholder senates into companies’ legislation or to include them in corporate governance codes, operating on the ‘comply or explain’ principle.

The proposal for Shareholder Senates will not be welcomed by most directors and their boards, because they would inevitably mean a shift of power away from the boardroom back to the owners. However, there was plenty of antagonism in British board rooms to the original Cadbury Report proposals: many thought independent outside directors were an unnecessary imposition and an infringement of executive directors’ right to run their own companies.

There is little doubt that Shareholder Senates will not be achieved without legislation and regulation. Such developments could be prompted by the ongoing dissatisfaction with the governance of the modern corporation. The newly appointed British prime minster, Theresa May, following the UK’s referendum vote to leave the European Union, mentioned problems with the governance of British companies in her inaugural statement.

Corporate governance evolves. Dissatisfaction exists over the present corporate governance model. Some boards readily accept a responsibility to engage with their shareholders. Others do not. Some companies are run for the benefit of their owners. Others are not. Criticisms multiply of board-level excess, particularly over board-level remuneration. Shareholder Senates would provide an opportunity to re-establish owners’ rights. They would give investors a more effective say in the governance of their companies. Power would no longer be abdicated by the owners to the directors.


Bob Tricker
September 2016

Executive Remuneration – Recent Developments

In my June blog piece, I highlighted the fact that executive remuneration remains a ‘hot topic’ in corporate governance. Subsequent to that piece, two interesting reports on executive remuneration were published.

Executive Remuneration Working Group Final Report July 2016

The Executive Remuneration Working Group consists of Nigel Wilson (Chair), Group Chief Executive, Legal & General Group PLC; Russell King, Remuneration Committee Chairman, Aggreko PLC and Spectris PLC; Helena Morrissey, Chief Executive, Newton Investment Management and Chair, The Investment Association; Edmund Truell, Chairman of the Strategic Investment Advisory Board; and David Tyler, Chairman, J Sainsbury PLC and Hammerson PLC.

The Executive Remuneration Working Group has made ten recommendations relating to increasing flexibility (recommendation 1); strengthening remuneration committees and their accountability (recommendations 2, 3, and 4); improving shareholder engagement (recommendations 5 and 6); increasing transparency on target setting and use of discretion (recommendations 7 and 8); and addressing the level of executive pay (recommendations 9 and 10).

The ten recommendations are as follows:

  • Recommendation 1: There should be more flexibility afforded to remuneration committees to choose a remuneration structure which is most appropriate for the company’s strategy and business needs.
  • Recommendation 2: Non-Executive Directors should serve on the remuneration committee for at least a year before taking over the chairmanship of the committee. The Financial Reporting Council (FRC) should consider reflecting this best practice in the UK Corporate Governance Code.
  • Recommendation 3: Boards should ensure the company chairman and whole board are appropriately engaged in the remuneration setting process. This will ensure that the decisions of the remuneration committee are agreed by the board as a whole.
  • Recommendation 4: Remuneration committees need to exercise independent judgement and not be over reliant on their remuneration consultants particularly during engagements with shareholders. To ensure independent advice is maintained, the remuneration committee should regularly put their remuneration advice out to tender.
  • Recommendation 5: Shareholder engagement should focus on the strategic rationale for remuneration structures and involve both investment and governance perspectives. Shareholders should be clear with companies on their views on and level of support for the proposals.
  • Recommendation 6: Companies should focus their engagement on the material issues for consultation. The consultation process should be aimed at understanding investors’ views. Undertaking a process of consultation should not lead to the expectation of investor support.
  • Recommendation 7: Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose the performance range.
  • Recommendation 8: The use of discretion should be clearly disclosed to investors with the remuneration committee articulating the impact the discretion has had on remuneration outcomes. Shareholders will expect committees to take a balanced view on the use of discretion.
  • Recommendation 9: The board should explain why the chosen maximum remuneration level as required under the remuneration policy is appropriate for the company using both external and internal (such as a ratio between the pay of the CEO and median employee) relativities.
  • Recommendation 10: Remuneration committees and consultants should guard against the potential inflationary impact of market data on their remuneration decisions.

The full report is available at:


High Pay Centre: The State of Play

The High Pay Centre published its Annual Survey of FTSE100 CEO pay packages in August 2016 and found that there is ‘no end to the rise and rise in top pay’.

FTSE100 CEOs continue to see overall pay packages grow by at least 10% whilst other employees see little or no growth. This exacerbates the gap between the pay of bosses and the pay of workers.

The Survey highlights that in 2015:

  • The average pay for a FTSE100 CEO rose to £5.48 million
  • The average pay ratio between FTSE 100 CEOs and the average wage of their employees was 147:1
  • The median FTSE 100 CEO pay was £3.973 million. This represents a slight increase from £3.873 million in 2014, but up from £3.391 million in 2010.
  • The slower growth in median pay suggests that the increases in average pay are driven by big pay increases for a small number of CEOs at the top.
  • One FTSE 100 company has employee representatives on the board. TUI, which recently merged with German incorporated TUI AG, has an airline pilot and a travel agent on its supervisory board.
  • No FTSE 100 company currently publishes its CEO to employee pay ratio

The report ‘The State of Pay: High Pay Centre briefing on executive pay’ is available at:


With the UK’s new Prime Minister, Theresa May, having a rather different take to her predecessor on executive remuneration, we can expect to see a shake-up in this area in the future with proposals such as companies having to publish the ratio between the pay of the CEO and the average worker in the business, and that ordinary employees should be involved in discussions over executive pay.


Chris Mallin 11th August 2016

The ongoing saga of the governance of Britain’s Railways

A case in Corporate Governance: Principles, Policies and Practices (Network Rail case 3.2, page 80) raises some interesting philosophical questions about the appropriate relationship between individuals, enterprises, and the state. The people in this case are British train travellers and taxpayers; the enterprises are the state-controlled Network Rail and private train-operating companies; the state is the UK government. Where should power and accountability lie? What is the most appropriate governance structure – a nationalized entity like the previous British Rail, individual private, profit-orientated train operating companies as now, with Railtrack plc responsible for the tracks, stations and signalling selling its services to the operating companies, or a re-classified state-owned corporation, with the national Treasury responsible for its debt?

The case quotes the then leader of the UK’s Labour opposition party, Ed Miliband, saying that when he returned to power at the 2015 election, he would consider re-nationalising the British railways system, re-establishing British Rail and taking over the privatised train operating companies. In the event the Labour party lost that election.

In June 2015, the Government suspended work upgrading two of the country’s most congested rail lines – Mainline Midland and the TransPennine route – because of cost overruns and missed targets. The decision came from the Treasury, which took over responsibility for Network Rail funding and therefore its debt after Network Rail was reorganized into a state-owned company.

Three months later, the rail regulator, the Office of Rail and Road, warned that the company might be in breach of its licence after they found flaws in the way it handled major projects. But the Government refused to release a critical report, which spelt out serious problems with Network Rail and might have undermined Government pledges, because of pending elections.

In July 2015, the Government replaced the Chairman of Network Rail, Richard Parry-Jones with Sir Peter Hendy. The Government also appointed Nicola Shaw, head of HS1[1] (the company known as High Speed 1, which runs the successful Channel Tunnel Rail Link) to draw up plans for Network Rail’s structure and funding. “Network Rail is not working,” she said, “There was a big change last year when its debt (then £38bn) was taken over by the Government. When you have a big change you ought to think about what you want to do from here.” The options she is considering include:

  • government continuing to fund the operation;
  • auctioning various routes (sections of track) as concessions to pension funds and sovereign wealth funds;
  • privatising the entire operation through a public listing.

Shaw said that she would stop short of considering reuniting track and train operations, as was the case under the previously nationalised British Rail. In September 2015, government ministers moved closer to a break up and sell off of Network Rail with plans for a radical overhaul of operations, shifting decisions on track maintenance and new projects to regional line managers. By February 2016, Shaw was suggesting spinning off individual lines to investors and introducing an agency to oversee the industry at arm’s length from government.

While waiting for the Shaw proposals, it seemed that the Chief Executive of Network Rail, Mark Carne, was being overseen by a civil servant, Philip Rutnam, permanent secretary at the Department of Transport, who was previously a merchant banker.

In October 2015, the Regulator issued a damning report naming ‘systemic failings’: a third of railway upgrades – new stations, extra track capacity, electrification of lines – were running late, and key project costs were spiralling out of control. In November 2015, the regulator fined Network Rail £2 million for delays and cancellations that constituted a breach of its licence. By November 2015, Network Rail admitted that train punctuality was not good enough as its debts mounted and six-month pre-tax profits fell by 23% to £246 million while operating costs rose by £88 million.

Meanwhile, Jeremy Corbyn, unexpectedly elected leader of the Labour Party in May 2015, put forward detailed proposals for the re-nationalisation of the fifteen independent train operating companies. Citing the continuing increase in rail fares, he said that bringing the entire network, including Network Rail, back under government control, had widespread support. Legal experts pointed out the potential difficulties, not least European Union law which requires member states to open up their transport networks to cross-border competition, which would rule out UK nationalisation. But in June 2016, the electorate decided in a referendum (Brexit) that the UK should leave the European Union.

Meanwhile the problems of the British railway system continue unabated. Blaming labour disputes, old rolling stock, and track delays, the Southern Railway network cut over 300 trains a day claiming this would make their services more “resilient”. Plans to re-route the new high speed line from London to the North ran through a newly built housing estate. Delays to rail, signalling, and electrification upgrades led to further late running and cancelled trains.

The Times in an editorial wrote that: ‘Thirteen years after its creation, Network Rail remains a byword for botched corporate governance. Without shareholders, ministerial oversight or direct contact with passengers, it is accountable chiefly to itself. It carries an unsustainable £38 billion debt burden but as a public body it has little incentive to pay this down or force on its staff the efficiencies that would cut costs.’

This has to be one of the longest running, unresolved corporate governance cases in the world.

[1] HS1 is owned by the Canadian investment funds Borealis Infrastructure and the Ontario Teachers’ Pension Plan.  It has a 30 year concession to run the Channel Tunnel rail link.

Bob Tricker, July 2016

Aggressive Tax Avoidance

The use of tax havens and other devices by international corporations, which was waiting in the wings when the third edition of Corporate Governance: Principles, Policies and Practices was written in 2015 (page 404), has now come centre stage.  The corporate governance debate on the topic of, so-called, aggressive tax avoidance seems to have consolidated into two main strands.

On the one hand are those directors and their professional advisers who argue that their role is to maximize their shareholders’ wealth in the long-term, running their organizations while keeping within the regulation and law of each country in which they operate. ‘Tax strategies such as transferring profits from high to low (or no) tax regimes by moving head office domicile, re-routing orders, or charging licence fees, are completely legal or we do not use them’, they say. ‘If governments and regulators do not approve of such strategies, they must change the regulations or the law.’

On the other hand, a growing school of thought argues that the board of a company owes a duty to a wider range of stakeholders than just their shareholders. If a company shifts profits out of a country in which it has earned those profits, the taxpayers of that country are denied the tax benefits that should accrue from the revenues they have generated. Though such a transfer may be legal, it is not fair and could be considered unethical.

In the UK, both the business and popular press have highlighted cases in which large companies and wealthy individuals have failed to pay UK tax. For example, London jeweller Mappin and Webb, holder of the silversmith warrant from Her Majesty the Queen, was shown to have paid no tax for five years on profits of £66 million. It transpired that Mappin and Webb was bought in 2013 by US private equity firm Aurum, which has a base in Luxembourg, a pivotal tax avoidance hub, even though a member of the European Union. Cadbury, the chocolate maker, was also shown to have paid no UK tax in 2015, although it generated over £2 billion in revenues. Cadbury had been sold to US corporation Kraft. The UK tax authorities have also challenged a number of schemes designed by tax accountants and lawyers to reduce or eliminate income tax for rich individuals, including sports stars, media personalities, and business people.

In the United States the Foreign Account Tax Compliance Act (FATCA) is intended to detect tax evasion by US citizens who hide money outside the US. The act requires all financial institutions, wherever they are, to report on the existence of all accounts and financial transactions of US citizens. This call for greater transparency has had unexpected consequences: some UK financial institutions now refuse to accept US clients, because the reporting requirements and the penalties for non-reporting are too great, and some American expats have begun the long process of renouncing their citizenship.

But tax havens are usually far more than vehicles for reducing tax. In fact it would be more appropriate to call them safe havens. Some companies incorporate in safe havens legitimately, even though they have no operations there, to reduce regulation and filing requirements, thus keeping their ownership and financial details unobtrusive. The majority of Hong Kong based companies listed on the Hong Kong Stock Exchange are incorporated in safe havens, many in the BVI. But others, of course, use safe havens as a bolt hole to hide the proceeds of crime or to launder money. Then, of course, there are those who use safe havens to reduce or avoid tax. So, some safe haven users are legitimate and legal; others suspect and, possibly, cloaking illegal activities.

The following table lists most of the significant safe havens. There are a few more minor ones.

Tricker post table

The classic safe haven has been Switzerland, with its banking secrecy laws. Although in recent years, Swiss banks operating in some countries, including the US and the UK, have been pressurized to provide information. Panama has recently come into prominence because of the leaked ‘Panama Papers’ from law firm Mossack Fonseca, which gave explicit details of many firms and individuals involved in offshore financial arrangements. The US state of Delaware provides no protection from US federal taxes, but does have a business friendly court and is less bureaucratic than many other states, which is why so many US corporations are incorporated there.

The British safe havens that are Crown Dependencies or British Overseas Territories have the Queen of England as Head of State and their final court of appeal is the UK Privy Council. Most are also members of the British Commonwealth, as are the Bahamas and the Cook Islands.

Just before being replaced, UK Prime Minister David Cameron held an international conference in May 2016 in London, which brought together many (but not all) of the safe havens with representatives of major economies. The main conclusion was of the need for more transparency, including information about the ultimate owners of companies resident in tax havens.

Bob Tricker, July 2016


Executive remuneration

For many years executive remuneration has been one of the ‘hot topics’ in corporate governance. Each year there is a furore around executive remuneration with the remuneration of CEOs often being a particular area of contention. This year we have seen the spotlight focussed on the remuneration of CEOs at high profile companies such as BP and WPP resulting in much shareholder comment and media attention.

There has been a lot of shareholder dissent this year over the executive remuneration packages at FTSE 100 companies. David Oakley, Michael Pooler and Scheherazade Daneshkhu in their article ‘UK companies switch to listening mode as heat rises on top pay’ (13 May 2016, Financial Times) state ‘Some of Britain’s largest companies are preparing for a summer of tense consultations on executive pay after one of the biggest waves of shareholder protests since votes on remuneration were introduced in 2002’. They highlight the top ten protests of 2016 (measured by % votes cast against remuneration packages) with BP, and Smith & Nephew receiving the highest levels of votes against, followed by Shire, Anglo-American, Devro, Aberdeen Asset, Lakehouse, SDL, Bunzl and Thomas Cook.  However, the votes against were in the majority only at BP, and Smith & Nephew, though the level of dissent was significant and sufficiently high to give concern to boards and remuneration committees at all of the companies listed in the top ten protest votes.

The interesting case of Lloyd Blankfein, Chairman and Chief Executive Officer at Goldman Sachs, gave rise to corporate governance concerns on two fronts. Firstly, Blankfein has held the roles of Chairman and CEO since 2006 and secondly concerns over the executive remuneration packages for the CEO and other executive directors. Alistair Gray, in his article ‘Goldman investors revolt over executive pay’ (20 May 2016, Financial Times), reports that shareholders and corporate governance advisors, such as Institutional Shareholder Services (ISS), were concerned that the costs of a multi-billion dollar legal settlement relating to mis-sold mortgage-backed securities before the financial crisis were not taken into account when determining executive remuneration. He highlights that ‘about a third of votes were cast against the remuneration of top managers……[and] a proposal to separate the roles of chairman and chief executive after Mr Blankfein steps down received a similar level of support’. Nonetheless, around two thirds of shareholders supported the executive remuneration plan; the fact that Mr Blankfein and other top executives each took a 1$million pay cut in 2015 may have influenced this voting outcome.

Of course, there is also concern over executive pay in many other countries. For example, recently the French government has taken action to give shareholders more power over executive pay.  Anne-Sylvaine Chassany’s article ‘French shareholders win say on executive pay’ (10 June 2016, Financial Times) highlights how a dispute at Renault between shareholders and the board of directors over executive pay contributed to a ‘UK-inspired provision in the Socialist government’s anti-corruption bill [which] will allow shareholders to vote on the pay packages of chief executives when they are hired or when the structure of their compensation changes. But it goes further than the UK say-on-pay approach by also allowing them to turn down the variable part, which is tied to companies’ annual performance, every year’.

It is clear that concern over executive remuneration packages will continue to generate shareholder dissent. The increasing emphasis on shareholder engagement should contribute to institutional shareholders in particular taking action against executive remuneration packages which are seen as over-generous – especially in cases where companies are underperforming.

Chris Mallin, June 2016

Shareholder communication

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

Shareholder communication

Listed companies need to communicate with their shareholders. Market analysts, potential investors, regulators, and others in the market also need ongoing knowledge about the company.  Formal requirements for such information are found in company law and stock exchange rules.  But companies need to go beyond these regulatory, financially-orientated demands.

In the original model of the joint-stock, limited-liability company shareholders were individuals, their numbers small, and their needs for information tended to be similar. Directors could communicate quite easily with them; indeed in many cases they knew them personally. But that was 150 years ago!

Today, shareholders are no longer homogeneous. The shareholders of a listed company could include institutional investors actively involved in the company’s corporate governance issues, passive institutional investors, such as index-tracking funds with little interest in corporate information, dominant investors, perhaps the company’s founders or their family trusts, hedge funds, private equity investors, state owned corporations, sovereign funds, and of course retail shareholders – individuals, usually with relatively small holdings.

Clearly, the expectations of such investors, their levels of business sophistication, and their need for information differ. However, company law and stock exchange rules seldom recognize such differences.

Moreover, some listed companies may not be sure who some of their shareholders actually are. In the old days, details of a new investor were duly recorded in the share register and a hand-written share certificate provided. But in today’s scripless system, holdings are recorded centrally and may be deposited with brokers. So the shares may be held in the name of the broker or custodian participant, with the actual investor not registered as the shareholder. Ownership information can also get buried in the string of intermediaries.

So what information should a company provide?

In many jurisdictions today, the call is for narrative information to supplement the classical, financial reports. For example, the Hong Kong Companies’ Ordinance, which came into effect in March 2014, calls for the publication of a directors’ report for the financial year containing a business review including:

  • a review of the company’s business;
  • a description of the principal risks and uncertainties facing the company;
  • particulars of important events affecting the company that have occurred since the end of the financial year;
  • an indication of likely future development in the company’s business.

Further, to assist the understanding of the development, performance, and position of the company, a business review must also include:

  • an analysis using financial key performance indicators, which are factors that effectively measure the development, performance or position of the company’s business;
  • a discussion of:
    • the company’s environmental policies and performance;
    • the company’s compliance with the relevant laws and regulations that have a significant impact on the company;
    • an account of the company’s key relationships with its employees, customers and suppliers and others that have a significant impact on the company and on which the company’s success depends.

In the United States and the UK, calls are also continuing for more information on companies’ environmental, social, and governance policies and performance (frequently referred to as ‘ESG issues’).

However, the decision on exactly what information to provide and in what detail is challenging. Too little and commentators might register disapproval; too much and the company’s competitive position could be eroded or ongoing negotiations, for example over an acquisition, could be jeopardized. The danger is that, in meeting the regulatory and other expectations, companies’ statements contain more public relations commentary than hard fact.

The Hong Kong Institute of Chartered Secretaries (HKICS) is currently undertaking a survey (in which I am involved) exploring shareholder communications in companies listed on the Hong Kong Stock Exchange. The results are due to be published later this year, and will be linked to this blog in due course.

The HKICS published guidance notes in 2009, emphasizing the discretionary opportunities available to companies to communicate with their investors and the market. They cited press releases, corporate websites with dedicated investor relations pages, company presentations, group briefings, and meetings ‘one-on-one’ with individuals. Such opportunities could be used, the notes suggested, to ‘provide background to support the already publicly disclosed information, as well as to articulate:

  • long-term strategy;
  • organization history, vision, and goals;
  • management philosophy and the strength and depth of management;
  • competitive advantages and risks;
  • industry trends and issues;
  • key profit drivers in the business’

But there is an inevitable dilemma in discretionary communication. One-on-one communication is fraught with difficulty. To protect the integrity of their market, stock exchanges require information which might affect share prices to be given to the entire investment community at the same time. So, can meaningful information be given to one, or a few, shareholders without giving them undue advantage by disclosing price-sensitive information?

Companies need policies on the conduct of meetings with analysts and how to respond to questions about future earnings, if necessary correcting forecasts they might have made about the company and its prospects. Companies could consider publishing their formal disclosure policy, which needs to be in line with their overall corporate governance strategy.

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see

On shareholder engagement

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

On shareholder engagement

Few institutional investors in the United States involved themselves directly in the governance of companies in which they invested prior to the failure of Enron, Waste Management and others in the early 2000s, and the collapse of Lehman Brothers and the bailout of financial institutions a few years later. Subsequently many felt the needed to be more committed. Many commentators also urged them to do so.

Involvement by shareholders in corporate matters can take many forms, for example:

  • submitting resolutions for decision at shareholder meetings;
  • rigorously voting shares at every opportunity;
  • campaigning on company matters though the media;
  • lobbying corporate regulators on company issues;
  • initiating a dialogue with the company.

Recent topics for shareholder engagement in the US and the UK have included:

  • alleged excessive levels of executive compensation;
  • executive incentive schemes that emphasize short- term performance;
  • de-emphasizing quarterly earnings to swing the strategic focus from short-term to longer-term;
  • calling for information on longer-term corporate strategies;
  • separation of the roles of chief executive and board chairman (still combined in some US corporations);
  • the composition and diversity of the board.

Recent surveys by IRRC, the Investor Responsibility Research Center in the United States (2011, revised 2014) reported that the level of engagement between investors and publicly-traded U.S. corporations had reached an ‘all time high.’ By ‘engagement’, the IRRC survey meant ‘direct communication between the corporation and investors on specific topics’.

Companies, it seemed, tended to view shareholder engagement as a series of discrete conversations. Investors, on the other hand, saw it as an ongoing process whose success depended on subsequent concrete action by the company.

Companies said they were devoting more resources to shareholder engagement, often through an executive team, with investment relations officers and representatives of the CFO and the Corporate Secretary. In some cases, directors were personally involved, including the board chairman, the senior outside (non-executive) director, and the chairmen of the board’s audit or compensation committees.

The IRRC report concluded that ‘evidence suggests that overall engagement levels will continue to trend upward, as investors seek to better understand, and mitigate risks at companies they intend to hold for the long term, while issuers seek to win support for company proposals, ward off activists, and keep shareholders happily invested in the stock.

A recent development (press reports March 2016) has been major institutional investors, such as Blackrock, Fidelity, and Schroders forming an Investment Association to engage with companies, challenging poor performance, excessive pay deals, or calling for information on longer-term corporate strategies rather than emphasizing quarterly results. This potential of ‘collective engagement’ increases the power of large shareholders to hold companies to account.

The pioneers of shareholder engagement were radical groups and religious organizations who used their shareholder votes to encourage change in corporate policies such as trading in weapons, tobacco, or alcohol. The movement to encourage corporate social responsibility followed, seeking to align business practices with desirable societal expectations in the interest of all stakeholders affected by the business activities.

Some writers argue that the more a company engages with its stakeholders, the more socially responsible it must be and the better its chances of long-term sustainability and improved shareholder value. However, research[1] on the topic has challenged that notion. More reporting does not necessarily lead to better relationships. Many other factors influence interactions between companies and their investors.

[1] Greenwood, Michelle, Stakeholder Engagement: beyond the myth of corporate responsibility, Journal of Business Ethics (2007) 74:315-317, Springer

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see

Executive compensation

Some ongoing corporate governance concerns

It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.

In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.

Executive compensation

Alleged excessive director level rewards remain one of the most contentious issues in corporate governance. Shareholder demands for a ‘say- on-pay’ have increased, although such intervention continues to be exhortatory rather than binding on companies.  A growing disparity between the wealth and rewards of the few at the top of society and the rest has swung the focus onto executive compensation. The subject also provides a flash point for activists challenging the role of capitalism society.

The traditional solution of the board-level remuneration committee, made up of independent, outside, non-executive directors, does not seem as effective as it was when the late Sir Adrian Cadbury included the idea in the first corporate governance code (1992). For one thing, those outside directors may well be executives from other companies, with their own interests in setting high remuneration levels. For another, industry norms for total remuneration seem to have been rising, thus setting bench-marks for levels needed to attract and hold the best people. Professional firms offering pay level advice tend to reinforce high levels industry-wide.

But new approaches have been appearing. The relationship between reward and performance has come under the spotlight, particularly where the reward seems to be unrelated (or worse inversely related) to performance. Some companies have adopted ‘claw-back’ terms that penalize top earners if they fail to meet set performance goals in the longer term. In Canada, institutional investors have called for the idea to become governance best practice. Other companies have used peer reviews of reward systems in their business sector.

Remuneration decisions should not be made piecemeal. Boards need to establish the underlying basis of their remuneration policy. Moreover, that policy needs to be disclosed to shareholders and other interested parties. Whilst maintaining an appropriate level of individual privacy, decisions on top level remuneration benefit from transparency.

Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see