Monday, 13 June 2011

Ed's speech and corporate governance

You may have noticed that Ed Miliband gave a speech today. Part of the speech was about the need for responsibility on the part of high earners, specifically in the business world, and there were two ideas floated about how Labour might potentially address this issue when next in power - disclosure of internal pay ratios and employee representation on remuneration committees.

So first up, pay disclosure: "companies should publish the ratio of the pay of its top earner compared to its average employee."

Note the 'should' (my emphasis) - there's no debate about this proposal. The interesting question about this idea is who is it aimed at? What I mean by that is that in my experience most shareholders, the big ones anyway, are even less interested in the 'pay gap' than they are in the scale of executive rewards. I think it's unlikely, therefore, that such information would be used by investors if disclosed. Beyond a handful of faith-based investor groups shareholders aren't, at present anyway, going to be voting against remuneration reports if the ratio is "too high".

But I think the data would get used by other groups - like Living Wage campaigners, NGOS, maybe union organisers, etc. I still don't think it will make that much of a difference, companies are often willing to tough out a bit of bad publicity, but arguably the importance of the proposal is that it's a reform related to executive pay that apparently doesn't assume shareholders and management are the only interested parties.

This view is reinforced by the second proposal of employee representation on rem comms. Immediately before floating this Ed said "we also need to recognise – as many great companies do - that firms are accountable to their workers as well as their shareholders". This will be uncontroversial to many Labour supporters, and it may well just be a throwaway line, but it's the sort of thing you wouldn't really have read in a speech on governance by a Labour minister (except Paul Myners) in the last five years. In corporate law and governance policy we somehow got wedded to an almost mythical view of shareholder capitalism, whereby only shareholders and companies had any role in boardroom pay, and we actively resisted pursuing any other course.

To suggest that we might actually put employees on rem comms makes an important shift away from recent Labour corporate governance policy, whether intended or not. I am sure many shareholders would be hostile to this, it's interesting to question whether they would regard employee representatives as independent, but that again arguably demonstrates why Ed may have something to gain by pursuing it. If you think executive pay is a problem, don't assume that a market solution to it. And, as I have said before, I personally believe there is a case for employee representation on its own terms, not just because it would be instrumental to tackling executive pay.

So taken together you could see these two proposals as marking a re-calibration of Labour's approach to these issues. But...

1. The language on employee representation - we should debate the idea - is notably weaker than that on pay ratios. Why not just say we will do it, especially when...

2. ...both ideas are already under active consideration by Vince Cable in the short-termism review. Personally I would not be at all surprised to see the Coalition move on pay ratio disclosure. I very much doubt they will go for employees on rem comms, but they have consulted on the idea (so you could argue that they've 'debated' the idea). As such as policy proposals these could be overtaken by events very soon, leaving us with nothing much to say again.

3. I'm still not sure we really know what we think about executive pay. There is a lingering impression that actually Labour still is "intensely relaxed" about rewards at the top - provided there is justifiable performance. This seems to be rooted in the (IMO) false belief that the executive pay problem, such as it is, consists primarily of rewards for failure. Personally I think it's more a question of scale of rewards allied to an "everyone must have prizes" mentality. That's a much tougher nut to crack than the rare, obvious cases of people cashing in when doing a bad job (and which everyone agrees are wrong).

In light of all this, my view is that we would be better off making both proposals firm commitments, and quickly, and use them as 'tests' for how serious the Coalition is about governance reform (because I think they will duck the employee representation one). I also think we must be willing to say that sometimes performance linkage isn't the only question to be dealt with in executive pay - sometimes we also have to question the amounts involved. Otherwise, as Ed says elsewhere, we can find ourselves outflanked by some very establishment groups (CBI etc).

1 comment:

CharlieMcMenamin said...

Slightly off topic - or at least it's only background reading - but I picked this up on my travels and thought it was relevant to your routine concerns.


Congrats on L&C's no.2 incipient arrival by the way.