Governance is on the political agenda

Our new Prime Minister elect’s trenchant comments on corporate governance should usher in some fresh thinking on issues such as remuneration and board composition.

It is fantastic to see corporate governance appearing high on the political agenda. ICSA: The Governance Institute, as the professional body for governance and with an obligation in our Royal Charter to lead ‘effective governance and efficient administration of commerce, industry and public affairs’, will continue to be at the forefront of corporate governance thought leadership.

However, some of the issues that we face are structural and not susceptible to quick and simple solutions. A fresh look at the boardroom is long overdue and although I entirely agree with the objectives that underpin Theresa May’s proposals to address the issues of executive pay and stakeholder engagement, I cannot help wondering whether these changes will have the anticipated effects. Much will depend on how they are implemented.

It is painfully clear that the current approach of reporting and voting on remuneration policies has not prevented the escalation in directors’ fees and bonuses, and ICSA has consistently argued that some pay decisions simply do not bear scrutiny. We agree that there is a need to rein in executive pay, but it is not clear that increasing the number of binding votes – whether on policy or implementation - will be the most effective way of doing so.

ICSA would favour an alternative approach of encouraging shareholders to make greater use of their existing rights to vote directors off the board, something that they have been rather reluctant to do. For example, in the five largest votes against the remuneration report that we have seen in 2016 to date, the average vote against the report was 54.08% and the average vote against the chairman of the responsible remuneration committee was only 1.39%.

If the individuals responsible for remuneration policies felt there was a real risk of them losing their seats on the board if they approve an outcome to which investors are likely to object, this might focus their minds rather more.

It may also be necessary to consider the mechanism by which executive pay is governed. The role of investors is to look after the long-term interests of their clients and beneficiaries, not to represent public opinion. The two may often coincide, but investors do not have a duty to act in the public interest.

That job belongs to regulators and governments and there are some very direct ways in which they could intervene to reduce pay – wage caps, for example. However, many of those possible actions are considered politically unpalatable and have huge potential for unintended consequences.

Clearly there is a need for the boards and remuneration committees of many companies to pay more attention to the views of, and impact on, their employees and customers. Although appointing directors specifically to represent those groups might achieve that, it is not clear how that could be compatible with the statutory duty of the board collectively to promote the success of the company for the benefit of its members as a whole. It may be that there is a need to revisit the definition of directors’ duties in company law to ensure that the interests of these groups are given due weight.

A more practical solution might be to reflect the position with whistleblowers, where one director has a special responsibility towards them, and create special responsibilities for one or more directors, ideally non-executive directors, to have regard to the interest of particular stakeholders – for example, employees and consumers – in addition to their normal statutory role.

As I said, these are not simple issues to resolve, but the ICSA policy team are doing some work on the future of governance in which we hope to be able to set out some helpful ideas.

Peter Swabey is Policy and Research Director at ICSA: The Governance Institute

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