With anti-elite sentiment in the UK running high following the Brexit vote, the British government is contemplating moves to curb executive pay and require worker representatives on boards. The Boardroom Report talked to Oliver Parry of the UK's Institute of Directors about the proposed changes.

    UK launches corporate governance inquiry2:24

    “Too often the people who are supposed to hold big business accountable are drawn from the same, narrow social and professional circles as the executive team. And too often the scrutiny they provide is not good enough. A change has got to come.”

    They are words you might expect from a left-wing firebrand — from Bernie Sanders stirring up the rank and file during the US Democratic Party’s presidential primaries, or from the Greens in Australia at a Senate inquiry grilling corporate leaders. But in fact this was part of a speech given by British Prime Minister Theresa May, a successor to Margaret Thatcher, addressing the annual conference of the UK Conservative Party last week.

    May had promised measures to overhaul corporate governance and curb executive pay as part of her campaign earlier in the year to replace previous Prime Minister David Cameron, who had fallen on his sword after the failure of the Remain campaign in the Brexit referendum. The proposals are intended to help heal the rifts in British society revealed by the Brexit vote.

    “Corporate governance in the United Kingdom is now right at the top of the political agenda,” explains Oliver Parry, Head of Corporate Governance at the UK’s Institute of Directors (IoD), in an interview with The Boardroom Report. “[May has] made it a priority to sort out the imbalances in society. One of those imbalances was the fact that CEOs seemed to be earning loads of money, but those at the bottom seemed to be struggling most of all. And that’s really brought into focus the whole issue over what CEOs earn, how pay is calculated, worker representatives on the board, the information that companies supply in their annual reports in terms of transparency around pay.” Parry said.

    Corporate governance in the United Kingdom is now right at the top of the political agenda.

    The reforms outlined by May in the three months since she became Prime Minister involve three main parts. The first is to require companies to hold an annual binding vote of shareholders on executive pay structures and pay systems to replace the current three-yearly binding vote. The second is to mandate that companies publish the ratio of their CEO’s pay to that of their median worker. And the third, the most radical, would introduce mandatory positions for workers on boards. A spokesperson for May has said that, in setting out this agenda, she is seeking to “reform capitalism”.

    Cautionary tales

    The shareholder pay initiative follows several revolts against pay policies of FTSE100 companies earlier in the year. These included a 59% vote against BP CEO Bob Dudley’s $US20m package – a 20% year-on-year increase – despite the company recording a $US6.5bn loss. More generally the push for governance reforms stems from two major corporate scandals: the collapse of retailer BHS, the sale of which by billionaire Sir Philip Green for £1 in 2015 has been the subject of a parliamentary inquiry; and allegations of improper labour practices, including the use of zero-hour contracts, against another retailer, Sports Direct International, whose own billionaire CEO, Mike Ashley, has also been called to answer before a parliamentary committee.

    The reform mood led to the establishment in September of a parliamentary Corporate Governance inquiry. The inquiry will examine the issues raised by the Prime Minister, as well as directors duties broadly, including whether the law is sufficiently clear on the roles of directors and non-executive directors, according to the inquiry’s terms of reference.

    The Prime Minister’s proposals have been met with what London-based newspaper the Financial Times describes as scepticism by the British business sector. However, they have received support from a number of institutional investors, including Fidelity International, Hermes Investment Management and Woodford Investment Management.

    For its part the IoD is likely to be supportive of annual binding votes on executive pay to encourage a conversation on the issue between shareholders and companies, according to Parry. On the other two prongs, it is also broadly in favour but waiting to see more detail.

    “We are really quite open to actually seeing how effective having a worker on a board would be for our listed companies,” Parry said. “But we want to see more detail behind it, and we would like to see it introduced flexibly on a ‘Comply or Explain’ basis, or voluntarily. There’s going to be issues about training and development because you can’t just pluck a 30-year old worker and stick them on a listed board. They need to be trained and developed and nurtured. So there’s lots of things we [still] need to consider.”

    If [Australian] companies fail to look to the long term and ignore the interests and concerns of employees, customers, suppliers, the community and other stakeholders, we risk further regulation.

    “We’re also quite supportive of publishing pay ratios. But with the caveat there is some context around the pay, because, clearly, the pay ratio of, say, a CEO at [supermarket chain] Tesco compared to the median worker at Tesco is going to be huge, whereas the median at an investment bank to the CEO is going to be a lot smaller.”

    The proposed changes in the United Kingdom could have impacts on Australian companies, according to Lysarne Pelling, Senior Policy Adviser at the Australian Institute of Company Directors.

    “If your corporate group extends to the UK, there may be direct ramifications for your organisation,” Pelling said. “It may also be relevant more broadly. Regulators and lawmakers from around the world closely monitor corporate governance developments in other jurisdictions. And the drivers of the UK inquiry are relevant here in Australia. If companies fail to look to the long term and ignore the interests and concerns of employees, customers, suppliers, the community and other stakeholders, we risk further regulation.”

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