The BEIS Parliamentary Committee reports today on its corporate governance inquiry launched last autumn. There is much to welcome in its recommendations, which span workers on boards and remuneration committees, board diversity, executive pay, private companies, directors’ duties and enforcement. Here we set out the Committee’s main recommendations, and where we think they should go further.
“We encourage more companies to appoint workers on boards”
The Committee says that “it should become the norm for workers to serve on boards”, and compares the change required to bring this about with the progress made in terms of appointing more women to boards. It also recognises that workers can bring both challenge and a long-term perspective to boards, noting that this has worked well both in the UK and abroad.
However, the Committee puts its faith in exhortation rather than regulation, and does not recommend making worker board representation mandatory, citing ‘difficulties’ such as the definition of ‘worker’ and how the post would be filled. Rather, they encourage companies to act within the existing framework to implement worker board representation, pointing to UK companies such as John Lewis and FirstGroup which have done just that.
It is great that the Committee has recognised the value of worker board representation, but the TUC remains sceptical that voluntary measures alone will bring it about. There are a range of potential solutions to the practical challenges of legislation – as is shown by the fact that worker board representation is a legal requirement in 19 countries across Europe. The TUC urges the Prime Minister to stick to her original commitment to require companies to put workers on company boards. A legal requirement is the best way to make worker board representation the new normal, as both the Committee and the TUC desire.
Executive pay – workers on remuneration committees and an end to LTIPs
The Committee’s proposals on executive pay are both simpler and more likely to be effective than those proposed by the government’s Green Paper on corporate governance reform. They recommend an end to (so-called) long-term incentive plans or LTIPs – a long-standing TUC ask. They propose that executive pay should comprise salary, a bonus linked to broader company objectives, including stakeholder relationships – and deferred shares, to be held for five years or more. The TUC has some concerns about payment in shares, which can risk incentivising a focus on share price, and it will be important that the handouts of shares do not become too large – otherwise, there is a danger that the gap between CEO total pay and workforce pay will continue to rise. Nonetheless, these proposals should bring an improvement on the status quo.
The Committee takes seriously the problem of the growing gap between executive pay and workforce pay, commenting that
“It is hardly consistent with [the Prime Minister’s] vision of an economy that works for everyone to see levels of pay for those at the top increasing at a rate that vastly exceeds increases for ordinary employees and which seemingly is at odds with the value created in the company.”
Their approach to addressing this is refreshingly straightforward. Arguing that “The best way of ensuring that the voices of the workforce are heard in pay discussions is to have an employee representative on the remuneration committee itself”, they propose that this should be included in the Corporate Governance Code. The TUC has been calling for worker representation on remuneration committees since 1995, so this recommendation is hugely welcome (as well as long overdue!)
Alongside a recommendation for companies to publish pay ratios, the Committee proposes that companies should report more broadly on their ‘people policy’. This should include a justification for the employment model used, as well as information on the use of fixed term and zero hour contracts and the use of employment intermediaries such as agencies, umbrella companies and personal service companies. While this would ideally be included in legislation rather than in the Corporate Governance Code (as proposed by the Committee), the recognition of the need for far greater transparency from companies on their approach to employment issues is very welcome.
The report includes an interesting discussion of the impact of shareholders on executive pay, concluding that their record in addressing pay is mixed at best. The Committee rightly resists the temptation to give shareholders yet more powers on pay, but do recommend that if remuneration reports receive the support of less than 75% of voting shareholders, the remuneration committee chair should resign and a binding vote on pay take place the following year.
Directors’ duties and stakeholder impacts
Much of the public distrust of companies stems from their stakeholder and societal impacts – from exploitative employment practices, tax evasion, abuses within the supply chain, late payment of suppliers – and so on. Yet the UK’s corporate governance framework is largely silent on how companies should interact with stakeholders, other than shareholders.
The exception is section 172 of the Companies Act, which requires directors to take account of company stakeholders in decision-making, although their primary duty is to shareholders. The TUC has long argued that directors’ duties should be reformed to remove the priority given to shareholder interests and require directors to promote the long-term success of the company as their primary aim. We have also argued that an enforcement mechanism should be developed, overseen by a Companies Commission, which could be a reformed version of the current Financial Reporting Council (FRC).
The Report does not recommend reform of directors’ duties, but it does acknowledge the problem that the existing duties are basically unenforceable. It calls for the FRC to be given powers to initiate legal action for breach of 172 duties, proposing also that the FRC should be re-established and renamed. This is very welcome. Given the centrality of stakeholder relationships to its expanded remit, it is essential that stakeholder representatives, including workers, are included within a revamped FRC.
In conclusion, while there are some areas in which we would have wished the Committee to have gone further, its report includes some very welcome recommendations that, if implemented, could make a real improvement to corporate governance in the UK.
A final question: is the government listening?