ICAS President Ken McHattie: Is the proposed pay plan useful?
ICAS President Ken McHattie asks whether governance reform will really produce "an economy that works for everyone."
Late last year, the UK Government issued its green paper on UK corporate governance reform. The document acknowledged that the UK is recognised as having a world-leading corporate governance framework, which gives us an international competitive advantage in relation to investment decisions.
The premise is to create “an economy that works for everyone” at a time “when the Government is developing an industrial strategy”.
I will not be alone in wondering whether it is the job of Government to create an industrial strategy but we can only hope that one of its aims will be to keep Government out of business’s hair.
However, the “green paper is part of wider work to enhance public trust in business as a force for good” – the Government believes trust in business has been eroded and that stakeholders are looking for a response.
These proposals impose yet more regulatory burdens on business without sufficient consideration of whether they will address the perceived problem.
The issues thrown up by the collapse of BHS will have been at the forefront of Theresa May’s mind in setting the criteria for the consultation. The downfall of BHS threw many of its employees onto the dole and left behind a huge pension fund deficit.
The Government has asked for views on executive pay, strengthening the employee, customer and supplier voice, and corporate governance in large private businesses.
The options for 'reform' include that shareholder votes on executive pay will become mandatory and binding and that information is provided on pay differentials between the highest paid employees and the lowest.
If enacted, these options in themselves are likely to have a limited impact on the corporate world. Most major corporations will be able to comply with such requirements without too much additional work.
The problem, as I see it, is that these proposals impose yet more regulatory burdens on business without sufficient consideration of whether they will address the perceived problem.
Take executive pay. The paper says: “There is a widespread perception that executive pay has become increasingly disconnected from the pay of ordinary working people and the underlying long-term performance of companies.”
It’s hard to argue with that, but why does anyone think the requirement to have mandatory shareholder votes on senior employees’ pay will encourage shareholders to take a more activist (and presumably negative) stance than at present?
Investors don’t need ratios to tell them the chief executive is being paid too much.
Is it really the case that shareholders are ignorant of the current remuneration levels in board rooms and are waiting to be enlightened by information to be provided in support of binding votes?
Isn’t it more likely that for many shareholders, their life span on the shareholder register is so short that remuneration levels are largely irrelevant to their investment decisions? Or even that they are happy with the current situation?
Or let’s consider the high to low pay ratio. What is the point of such ratios when they are so lacking in nuance? For example, why should companies that currently outsource low-paid work benefit from a more attractive ratio than a business which keeps it in-house? And by applying the ratio only to the UK workforce, it will benefit those businesses that put low-paid work offshore.
Whether or not anyone feels strongly enough to take steps such as these simply to improve their published ratios is neither here nor there – we should not be encouraging such behaviour by imposing a flawed disclosure regime.
UK governance is world-leading in many areas but it is essential that we keep it that way. However, what the world needs now is appropriate and properly targeted regulation. Investors don’t need ratios to tell them the chief executive is being paid too much.
Read the full version of this article in the March 2017 edition of CA magazine.