The British press were this weekend widely tipping that the publication of Theresa May’s flagship corporate governance reforms will be published this week. The BBC, Guardian, Telegraph, Sunday Times, and Scotsman have all run more or less the same articles over the weekend highlighting the key features of a proposed Bill:

• A requirement for companies to publish pay ratios showing the difference in pay between the chief executive and average employee;
• Improving the effectiveness of remuneration committees and the extent to which they must consult shareholders and the wider company on pay;
• Employee advisory representation on remuneration committees;
• A binding annual shareholder votes on executive pay packages; and
• Private company directors will be subject to a new code of conduct on behaviour and transparency.

Nearly all the articles highlight the government’s views, attributed to “an un-named government source” who stated that: “Businesses are a pillar of our society, creating employment opportunities and contributing significantly to funding our country’s public services.

“The UK has led the world in corporate governance, but our strong reputation can only be maintained if government and business regularly reviews and upgrades our governance.

“Good governance helps companies take better decisions, for their own long-term benefit and the economy overall – ensuring public trust in British business and making sure the UK is the best place in the world to do business.”

Late last week, the think tank Big Innovation Centre, published a report suggesting that there is little point in just requiring the disclosure of pay ratios. The authors argue that more transparency of executive pay has not seen a reduction in executive pay and so it is unlikely that ratio disclosure would work either.

Pay ratios, the report states, do not lend themselves to valid comparisons between companies, even within the same industry, and would add to misunderstanding over executive pay as well as potentially creating perverse incentives. They would also, the authors believe,  fuel excessive negativity over pay, when the UK needs great leaders to create our great companies.  Pay ratios may lead to pay being decoupled from performance, in favour of being linked to median worker pay, the report suggests.

While the report acknowledges that executive pay is an issue that needs to be addressed – as the UK government has promised to – it states that: “It is vital that listed companies are able to attract talented CEOs, given that such people always have options about where they work. The commentary around executive pay can be so relentlessly negative that we are in danger of forgetting this important fact. Good CEOs remain good value.”

The report’s authors have been supported by a steering a committee which includes Andy Haldane chief economist of the Bank of England and Clare Chapman non-executive at Kingfisher, although it was interesting to note a rare correction on the Financial Times in relation to Andrew Witty’s participation: “As a result of a miscommunication with the Big Innovation Centre we stated Sir Andrew Witty supported its report on executive pay, which rejected proposed government policies (Theresa May suffers backlash over flagship business reforms, November 24). Sir Andrew is a member of the group’s taskforce but was not involved in the creation or approval of the report.”

Among the report’s recommendations are that:

• Escalating pay votes: a binding vote regime should only be triggered when companies lose, or repeatedly fail to achieve a threshold level of support on, the advisory remuneration vote;
• Shareholder guidelines and the UK corporate governance code should enable companies to adopt simpler pay structures for CEOs and
• Companies should be required to publish a Fair Pay Charter explaining policy and outcomes for wider employee pay and fairness and to engage with employees on its content including specified disclosures on pay comparisons.

Simon Walker, Director General of the Institute of Directors, disagrees that change is unnecessary and asserts that the Prime Minister is right to press ahead with reforms. Writing in the Sunday Telegraph, Walker states: Suggestions to change how pay is set and published, alongside moves to give employees a bigger voice in the boardroom, will be met with resistance from the City old guard. They will be right to point out concerns about crude, kneejerk measures. Trying to force German-style co-determination on companies, for example, by creating extra tiers of governance for workers, would likely be disastrous. But resisting all reform would be sending a very strong signal to the public that corporate boards have either not noticed public antipathy to big business, or worse, don’t care. So when FTSE boards feel tempted to grumble at the appearance of the Government’s Green Paper, they should remember the words of the ageing Don Fabrizio in Giuseppe di Lampedusa’s novel, The Leopard: “If we want things to stay as they are, things will have to change”

Last Updated: 27 November 2016