The BIS Select Committee of MPs has launched an inquiry into corporate governance focussing on executive pay, directors duties, and the composition of boardrooms. That includes worker representation and gender balance in executive positions.
It has been prompted by the recent comments from the Prime Minister and the Committees recent inquiries into BHS and Sports Direct where major failings were revealed in the way those businesses were run. The terms of reference for this inquiry are very broad – see this web page for more details: http://www.parliament.uk/business/committees/committees-a-z/commons-select/business-innovation-and-skills/news-parliament-2015/corporate-governance-inquiry-launch-16-17/ .The deadline for submissions is the 26th October and ShareSoc will be undoubtedly making one. Let us have your suggestions to include.
Committee Chairman Iain Wright said “We need to look again at the laws that govern business and how they are enforced” and that “Whopping pay awards to senior executives are not only vastly bigger than workers could ever expect to receive but often seem to have very little relationship to company performance”.
Comment: We have of course had several similar reviews in the past, with the invention of the UK Corporate Governance Code (one of the strongest in the world), and the Kay Review where the on-going problems were spelled out. But the problems keep on coming back because non-executive directors seem to be generally spineless, appear to have little interest in controlling pay (why should they when they swim in the same pool and moaning about pay means they won’t be on the board for long), and shareholders likewise exercise little control.
In the latter case, institutions not only don’t much care (on pay because management in those companies get paid similar amounts) but they do not have the willingness to put in time and effort on such issues and hate to fall out with the directors of companies in which they invest. At best they pass the buck to advisors. Regrettably private investors who have more interest have also been sidelined, have difficulties in voting now with the nominee system now prevalent and are not adequately represented however much ShareSoc tries.
A lot of the problem on pay lies with Remuneration Committees where votes at AGMs are too late to influence matters and the use of Remuneration Consultants resulted in the ratcheting up of pay by the use of comparable company figures where nobody wants to be in the lower two quartiles.
ShareSoc has proposed in the past the use of Shareholder Committees to improve matters, and another version of this has recently been proposed by Chris Philp, MP, in a paper entitled “Restoring Responsible Share Ownership”. These are both worthy attempts to tackle the problems in UK public companies.
Having worker representation on Remuneration Committees, or on boards, or having more female representation is surely a diversion though. One or two people won’t change the culture of boards or Remuneration Committees. Indeed female representation in non-executive directors in larger companies is now high, and they frequently chair Remuneration Committees – one sometimes suspects because they might be a “soft touch” and be good at fending off criticism.
One should really step back and say: Why should any director be on a Remuneration Committee? Why should directors be determining their own way, directly or indirectly? Remuneration Committees should be completely independent even though they might take advice from the executives from time to time. Shareholders and other stake holders in the company should make such decisions.
Likewise the nomination of directors, and their initial pay, needs to be determined by shareholders and other stakeholders. And very importantly, that needs to include the views of individual private shareholders who are more likely to live in the real world and have a direct financial interest in the companies in which they invest.
At least that is my personal view.
Let us hope the BIS Committee have plenty of time to study these issues because these are complex issues and no doubt they will be side-tracked by a lot of institutional representation and the bosses of companies who benefit from the current arrangements. Ultimately though the issue is quite simple: how to wrest control of companies from self-appointed boards who determine their own pay!