Archive for the ‘Theresa May’ Tag
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
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: http://www.theinvestmentassociation.org/assets/files/press/2016/ERWG%20Final%20Report%20July%202016.pdf
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: http://highpaycentre.org/files/The_State_of_Pay_2015.pdf
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