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Dangers of the silver bullet

26 September 2016 by Peter Swabey

Dangers of the silver bullet - read more

There is little to say what the ‘right’ ratio is, says Peter Swabey

I was drafting this article, considering Chris Philp MP’s proposals for executive remuneration, when news broke of the decision of the Business, Innovation and Skills (BIS) Committee to launch an inquiry on corporate governance. The inquiry will focus on executive pay, directors’ duties and the composition of boardrooms, including worker representation and gender balance in executive positions – this necessitated a rapid redraft.

We were contacted by a member in response to the technical briefing that we issued on Mr Philp’s proposals, taking us to task for being ‘lukewarm’ about them. He was quite right, but only because we do not think they address the causes of the issues and so are not convinced that they will achieve what Mr Philp believes they will.

One of the dangers in the corporate governance debate has been the panacea – the idea that one solution is a ‘silver bullet’ that will solve all issues. We all have our own hobbyhorses, but there is a danger in allowing ourselves to believe that our own solution will solve everything.

There have been many ‘solutions’ to corporate governance challenges over the years – some of them have brought unforeseen consequences in their wake. For example, it is often asserted that one of the causes of the ratcheting of executive pay was the increased transparency of remuneration reporting, and recently we have seen the EU bonus cap for bankers translate into lower bonuses but higher salaries for some.

Simon Osborne talks about the challenges of one of Mr Philp’s solutions – annual mandatory shareholder approval of pay – in his column, 'A change in approach', this month. Mandatory publication of pay ratios will produce an interesting statistic, but there is little to say what the ‘right’ ratio is – it will vary between companies. Shareholder committees address structural governance issues surrounding closely-held companies but shareholdings in UK companies are highly diversified and, in many cases, ultimately foreign held. Consequently, there is no certainty that the interests of the five largest shareholders will be the same as the others.

Winston Churchill once commented that: ‘Some people see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.’ Trust in businesses and confidence in their effective governance are at a low ebb. In many cases this is well deserved, but we must not forget that it is business that creates wealth throughout our society and that there is a commercial need for companies to attract and retain executive talent.

Our focus is, therefore, on looking at how to restructure the governance of executive pay to ensure that it accurately reflects the best interests of the company and its stakeholders. That means looking at:

  • What are the criteria against which executive performance is measured and how are they chosen?
  • To what extent are pay outcomes directly attributable to those criteria and is that the result of objective or subjective assessment?
  • Who exercises judgement over the subjective assessments and discretion as to whether those pay outcomes are appropriate, and how are those people selected?
  • Who reviews the decisions made and on what basis is this done?

We must also consider another question – one which strikes at the heart of the role of business in our society – and that is why there is such focus on pay in public companies. If we are taking a serious look at pay inequality, then there is also the question of pay in private companies and LLPs; and of pay in other sectors of our society, be it the professions, the media, entertainment or sport. In all these areas there are individuals who receive rewards beyond the dreams of most.

The governance professional is ideally placed to understand the need for change in some areas and consistency in others and to think through the changes that need to be made to minimise the risk of unforeseen consequences, some of which have bedevilled previous corporate governance reform.

ICSA welcomes the Committee inquiry. It is good to see these important issues subject to an informed and robust examination. The ICSA policy team will be responding shortly – share your thoughts and contact us

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

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