New Year, New Thinking? Executive Pay And UK Corporate Governance: A Simmering Issue

The UK government heralds in 2019 with new regulations that come into force today, January 1st, to improve transparency on executive pay. For the first time, the UK’s biggest companies will have to disclose the pay of their top bosses and the gap between that and their average worker and start reporting on it in 2020, covering CEO and employee pay awarded this coming year.

“The regulations coming into force today will build on our reputation by increasing transparency and boosting accountability at the highest level - giving workers a stronger dialogue and voice in the boardroom and ensuring businesses are accountable for their executive pay” said Greg Clark, UK Business Secretary.

The new regulations, for UK listed companies with more than 250 employees, are also “a key part of the wider corporate governance we are bringing forward as a Government to help build a stronger, fairer economy that works for businesses and workers” he added.

Executive pay and the way in which it highlights social and economic inequality remains a simmering issue in a country which remains bitterly divided by the referendum vote held by the UK government over two years ago now to leave the European Union, as research from the High Pay Centre and CIPD highlighted in 2018.

But there is not much evidence that Britain’s boardrooms are listening.

Much that is written about better corporate governance by boardroom consultancies is couched in the language of being ‘risk averse’, aka fawning to a reliable market of established FTSE 350 Chairmen for lucrative business, rather than providing fresh direction for business strategy and valuable innovation in a fast-changing world.

The UK government’s focus on executive pay stems from the appalling lack of trust in British business by its consumer population.

The Edelman Trust Barometer at the start of 2018 said it all.

Ten years after the financial crisis, the sales incentives offered, the gender imbalance, further compounded by the gender pay gap and the very rationale in heading for a career in financial services are the problem - as the Group of 30 reported last year, and I covered on Board Talk. on their identification of the need for a ‘change in mindset’ among the banks.

The valuable conversations about better corporate governance - the essence of a business - are the ones that are willing to explore new directions for the future of the corporation as we grapple with technological transformation, empowered consumer choice and new ways of working. There are many examples apart from that one, linked to the Financial Times. Because the essence of a business is dealing with everything at once, as part of a whole, not merely ticking ‘governance’ boxes for compliance and statutory reporting.

In other words, if both ‘best practice’ in corporate governance and ‘fairness’ are the goals, then the measures taken by legislating have to join up from disparate corners and present a unified goal.

You can’t talk about fairness, executive pay and best practice in corporate governance without also talking about cybersecurity, one of the highest issues on any boardroom’s agenda in 2019. Talk about cybersecurity, and you quickly find yourself talking about the government’s immigration policy.

You can’t talk about reforming the audit market - at the heart of too many corporate disasters and real-life pain for the lower paid in any organisation - without talking about the accounting truths at the heart of the problem.

And you can’t talk about the need for digital transformation and new ways of running businesses without talking about workers’ rights, their fundamental value as human capital and tackling the ethical choices and values underpinning new business models.

But that is exactly what the UK government did with its response to the Taylor Review of Modern Working Practices - a topic that demands revisiting.

Joined up thinking is at the heart of better corporate governance, and there is little indication as we head into 2019 of real progress towards another critical ingredient for better businesses: real progress on diversity in all its manifestations ie gender, race, ethnicity and inclusion.

Until that happens, a much-heralded focus on better corporate governance remains tethered to what has obsessed Britain since June 2016 - politics - while Britain’s businesses focus hard on mere survival, and who knows what happens then on governance ?

Alongside the new pay ratio reporting, however, the UK government has introduced a new statutory duty on companies to set out the impact of share price growth on executive pay outcomes. “This will provide greater clarity and for shareholders about the impact that significant share price growth can have on executive pay outcomes and whether discretion has been exercised before pay awards are finalised” said the Department for Business, Enterprise, Innovation and Skills (BEIS) today.

Now that’s interesting. Because dividends and share buybacks are at the heart of much that needs sorting out before we can move away from shareholder primacy to the social purpose of business, the one the younger generation seems to assume is obvious, while the older one is in denial.

Thank you for reading - and Happy New Year.

Photo credit: Kazuend on Unsplash