Chuka Umunna develops Labour policy on corporate governance

Chuka Umunna gave an interesting speech today on executive pay. In fact content-wise it's the best speech by a senior Labour politico I've read since Paul Myners was City minister. The content of it is important for a number of reasons.

First, it acknowledges that the issue is not simply one of "rewards for failure". Everyone can agree that the odd Fred Goodwin type case is A Bad Thing, and so it's easy enough for politicians to say that they disgree with them. It has, until recently, not been agreed that high executive pay is in itself a problem, and widespread one. By talking about "excessive pay and rewards for failure", a small but important shift has taken place, and that means a potentially more radical approach from Labour in the future.

This point is seemingly confirmed by the second thing I liked - the defence of political interest in executive pay. It's easy to forget how quickly the framing of this issue has shifted, even within Labour, so the easiest thing is a direct comparison. Here's Kitty Ussher in June 2008 when she was a Treasury minister:

[W]e will also resist the calls that have been made for direct regulation of executive pay.

Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and of shareholders – and we don’t support ‘rewards for failure’. [see what I mean!]

And over the last ten years, we have taken steps to improve transparency, and to encourage shareholders to improve accountability.

But I’m clear that executive pay is a matter for Boards and shareholders – not for Governments.

In contrast, here's Chuka Umunna in January 2012 (!):

There are some who say it is no business of government - no business of politicians - to be commenting on these matters. We have no right to interfere in the affairs of privately owned companies is their refrain. I could not disagree more strongly with that statement.

At the heart of my politics is the belief that we are all mutually dependent. This notion is deeply embedded in the values of the Labour Party. Better together. Stronger together.

So to argue that politicians and society at large, should not take an interest in these matters, is to feed the idea that society is here and business is over in the corner there which is dangerous.

That's a big change in tone.

Thirdly, this is the first speech I can remember from a politician covering the corporate governance brief where the motivational value of financial incentives for directors has been questioned. This may, in part, be because Labour has agreed to implement all the High Pay Commission's recommendations, and the Commission's full report is a bit sceptical about incentives. Still, it is really valuable that someone with political power is saying stuff like this:

This demonstrates what psychologists have already found – that the relationship between financial incentives and performance is far from simple, and is not even reliably positive.

At the same time, the heavy focus on the alignment of high powered incentives risks crowding out other, more rounded but equally powerful intrinsic motivations of executives that are just as relevant to the company’s success – the satisfaction of doing a good job, the pride in leading and growing a great company, of winning in the market place, of having the respect of peers, of creating a legacy of sustained and sustainable success.

We are not opposed to performance related pay but it does make you wonder: if a company is so concerned that an executive paid only their salary won’t be motivated to work hard in the best interests of the company, then maybe they have the wrong person in the job?

This is broadly what I think, so would be supportive anyway, but it is really encouraging to see a politician willing to at least entertain the idea that there might be more to reform of the structure of exec pay than better carrot design.

And that leads on to the last point I would make - that there are a few ideas in here. The suggestion for Swedish-style shareholder representation on nomination committees is pretty radical stuff in terms of willingness to entertain a quite different approach to current UK practice (I think I detect the hand of Paul Myners, as he has pushed this idea). I know it's easier to float radical ideas when you are in opposition and don't have to put them into practice, but nonetheless this speech does seem to indicate that in a pretty important area of policy Labour is willing to do some thinking.