UK Reveals Proposals for Governance Reform, Executive Pay Regulations

UK Reveals Proposals for Governance Reform, Executive Pay Regulations

The UK government has released a much-anticipated green paper containing its ideas for reforming corporate governance and reining in executive compensation practices perceived as excessive. The paper largely aligns with what Prime Minister Theresa May and her cabinet have been talking about doing since taking office in July, but the government intends for its reform program to apply not only to public companies, but to privately-held corporations as well. Bloomberg’s Alex Morales outlines the proposals:

Workers would have to be represented on company boards, for example by a non-executive director assigned to them, and executive pay would face annual binding shareholder votes under the plans outlined on Tuesday by Business Secretary Greg Clark. Businesses would also be compelled to publish the compensation ratio between executives and average workers. The plans are subject to a public consultation that ends Feb. 17. …

The government plans to create a “bespoke code of practice for the largest private companies,” with which firms would have to “comply or explain” in their annual accounts, according to May’s office. Such companies would also have to heed reporting requirements on workforce diversity, greenhouse-gas emissions and social and community issues, it said.

After coming out strongly in favor of appointing employee representatives to boards this summer, May had backtracked on that position, assuring companies that they would not be required to appoint such representatives, but rather encouraged to develop their own models for giving employees a voice in governance. What the paper proposes is to give employees, and perhaps other stakeholders, some form of representation on board, but not to “mandate the direct appointment of employees or other interested parties.”

The Trades Union Congress, an advocate of worker representation on boards, is unsatisfied with this compromise position, Jessica Elgot reports at the Guardian:

[T]he general secretary, Frances O’Grady, said: “It It is very clear from the poll the TUC is publishing today, that the majority of people want the prime minister to keep her promise to have elected workers on boards. That’s not just because it’s the right thing to do, it is better for business too.

“In countries that have workers on boards, which is the majority in Europe, it shows that they have better investment in R&D, better investment in skills and they tend to take decision that are more about the long term, because of course, workers are champions of the long-term success of a company because their livelihoods depend on it.”

Mathew Lawrence, a research fellow at the Institute for Public Policy Research, tells Jo Faragher at Personnel Today that overall, the government’s proposals may not be forceful enough to have the intended impact on the UK’s business culture:

“The aim of corporate governance reform should be to tackle the deep-rooted problems in the UK’s economic model: low levels of business investment and high levels of pay inequality. While welcome, these announcements don’t go far enough to address these fundamental challenges. The evidence shows there is little correlation between executive pay deals and business performance.

Consulting workers on executive pay is a good first step but lacks bite; nor is it likely that transparency on pay ratios will be enough to rein in excessive remuneration packages.”