Prime Minister Theresa May has announced an intention to help restore trust in business by addressing executive pay, reviewing shareholder rights and responsibilities and introducing employee representation on boards.
These statements, especially in the context of recent governance failures, indicate that all companies are likely to have to review their own governance systems and frameworks in the near future.
Trust, transparency and executive pay
Transparency, trust and shareholder rights and responsibilities are likely to be the heart of any governance reforms.
Theresa May’s proposal to shift the annual votes on directors’ remuneration from being advisory to binding plays to all of those points and is something the Executive Remuneration Working Group (set up by the Investment Association) has recently published its final report on, including the following proposals:
- Boards should explain why they have chosen their company’s maximum pay level, with consideration of relativities such as the pay ratios between CEOs and employees.
- Greater transparency around the target setting employed in bonuses, plus clear disclosure of the rationale to be provided when discretion is used in awarding pay.
- Entire boards being engaged in the remuneration-setting process, and a requirement for the Chair of the remuneration committee to have at least a year’s experience on the committee.
Whilst a focus on executive pay and how it is approached by shareholders is absolutely required, PwC’s recent “Time to Listen” report suggests that “policy needs to focus on pay and opportunity for ordinary workers as much as on pay at the top if we are to achieve an enduring settlement on this issue”.
The focus must be on rebuilding trust, but not necessarily simply via more regulation.
Accountability and board representation
Theresa May’s suggestion that employees be appointed to company boards represents a reversal of around 40 years of government thinking, although some companies, like First Group plc have adopted that approach for 27 years.
The proposal raises some interesting practical considerations, not least the interaction with the directors’ duties codified by the Companies Act 2016 and the need for all directors to promote the success of the company for its shareholders.
For privately owned companies, however, it could be an alternative to the oversight role that shareholders of public companies play in holding the board to account.
Transparency and accountability in the boardroom have also recently been considered by the Institute Of Chartered Secretaries and Administrators.
The Governance Institute’s consultation on minute writing, which posed the question of whether minutes of board meetings should be published, as is common practice in the public sector.
Whether it’s through employee representatives, publication of minutes, external shareholders, or the presence of independent non-executive directors, it’s clear that all companies must have a governance framework that can hold directors accountable for the sustainable success of the company.
Theresa May’s statements are aimed at enhancing the effectiveness of existing corporate governance structures.
Establishing and maintaining an appropriate corporate governance structure is a challenging task, particularly for small and mid-size companies, or those in a period of fast growth, but it communicates a clear intention by a company that it will conduct its business in a transparent way that is likely to attract future institutional investment.
Effective corporate governance inspires trust between a company, its shareholders, its employees and other stakeholders, which in turn helps drive growth through investment and a corresponding reduction in the cost of capital.
There are many ways to approach it, dependent on ownership structure, sector and size of companies, but a renewed focus on corporate governance can only be positive in working towards rebuilding trust.
Philip Patterson and Kate Elsdon are in PwC Legal’s Entity Governance and Compliance team.