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!
Roger Lawson
I think the underlying problem is that the law currently doesn’t afford shareholders the rights that should go with being the owners of a company and hence the employers of its directors. We don’t hire them, fire them or decide what to pay them.
If you agree with me on the above points, everything – including how ShareSoc should respond to the current consultation exercise – flows from these two statements.
Providers of sharedealing platforms should be obliged to enfranchise individual shareholders. Fund managers, who hold shares in aggregate for individuals, should be obliged to consult us, and to vote as we direct. And shareholders should elect the members of the key board committees, particularly appointment and remuneration.
By these means – and only by these means – can the directors of publicly quoted companies be returned to the status they should occupy, namely that of employees of the shareholders, engaged to do their (our) bidding.
Totally agree with you Mark.
Roger Lawson
Something which isn’t obvious to me, and perhaps not to boards either, is what the consequence would be for an individual company of offering a substantially lower pay package. At one end it could be that it wouldn’t make any difference at all – does a CEO really care if they get 8 million rather than 10 million? At the other end it might mean they couldn’t recruit anyone at all with the right experience. Is there any evidence? Has any company tried it?
I think the High Pay Centre looked at this and came to the conclusion that the argument that one had to pay a lot to recruit the best did not hold water. In practice of course a lot of senior management appointments come from within the company. Certainly when I was running a business I found it easy to not pay folks more when they were given a grander job title, more responsibility and more power with the promise of jam in the future. But I may just be a mean sod of course.
Roger Lawson
If non-execs were in the business of maximising returns to shareholders, rather than looking after the executive directors who brought them on board, they would approach a tender-like approach to key hires: cast the net wide for candidates, and ask them what they’d charge to do the job.
While I’m no fan of box-ticking diversity for the sake of it, considering a wider range of candidates for roles and being open-minded about ‘outsiders’ who’d do the job for less than the obvious suspects would, I believe, drive remuneration down while also boosting performance.
I think the idea of employees on the board is a red herring. The directors are employees! And that is how they should see themselves, running the company for the benefit of its owners. I thought the idea of a Shareholder Committee to appoint directors and fix their remuneration was a good one.
If a company is actually run for the benefit of its owners, rather than for a small number of senior c-suite level managers, then it would be run with the long-term in mind, and would therefore also be run in ways which benefited all staff. A happy workforce is a productive workforce, and all that!
Interesting point. If we can change the balance of power so the directors of listed companies realise they’re employees, it defeats the argument for other employees to be separately represented on the board. Plus if employees want their views heard, they can do so, by buying shares in the company.
Executive share option schemes are far too generous and should be controlled or banned. These grant ownership to the directors at below cost or no cost, to the detriment of the original shareholders with no downside. This form of remuneration avoids taxes and NI and often rewards luck or even encourages accounting shenanigans.
Executives should participate in the same share option plan as any other employee.
I agree. While originally intended to align management’s interests with those of shareholders, LTIP schemes as generally applied contain a fatal flaw: directors are incentivised only on the upside, and are protected against any downside. If a company does badly, the LTIP is not triggered, so no shares are acquired, but the director still gets paid. So he or she (normally he) still enjoys upside, just less of it than if the share price had risen and the options vested.
Returning to my suggestion that appointment committees should cast the net wider and ask candidates to pitch on price as well as strategy and past performance to drive down pay, why not also require them to buy shares on joining? Normal, unrestricted shares, in the marketplace. If they can’t afford them, the company can loan the money, set against future salary payments. That way, they’re as exposed as the rest of us to negative movements.
If nothing else, this would kill the phenomenon known as ‘kitchen sinking’. When a new CEO joins, or if a company experiences a difficult period resulting in share options not being triggered, it’s in the interests of its executives to put as much bad news as possible into the public domain, driving the share price as low as they can, hence setting a low base for the next tranche of options. If such a tactic sent their personal net worths seriously southward, they might think twice…