“I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders. In practice, they are drawn from the same narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m prime minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but workers as well.”
So there we go, the incoming Conservative Prime Minister has committed to having workers represented on company boards. As always, these high level statements leave a lot of unanswered questions. By "represented" do we mean the workers themselves are on the board or someone else speaks for them? By "on company boards" do we mean as directors, equivalent to non-executives, or something different? How are these people appointed? Do these policies imply changes in company law?
Nonetheless, this does represent a public commitment to a shift in corporate governance in the UK that it will be hard for the incoming PM to row back from. We need to see the precise details before saying this is unequivocally A Good Thing. But it has certainly set the cat amongst the pigeons, and is definitely a notch to the Left of some of the baby steps Labour "moderates" have advocated. Even the IoD has backed the idea.
May's other proposals are pretty much same old same old - a binding vote for shareholders on exec policy every year rather than every three (which was the original idea before some in the asset management industry lobbied for a triennial vote) and on specific aspects of pay (again part of the last exec pay consultation by BIS undertaken under the Coalition). I also read she proposed pay ratio disclosure - once more an idea consulted on under the Coalition but dropped (and opposed by the asset management lobby if I remember right).
I am going to enjoy the rare privilege of saying I Told You So. I think the direction of policy around corporate governance in general and executive pay in particular has been pretty obvious for the last few years. We had kind of reached the end of the road for the 1990s vintage version of greater disclosure and increased shareholder powers. I mean this in two senses. First, there wasn't a lot more to be done - hence the main thing May has proposed in terms of shareholder powers is increasing the frequency of binding vote, and the disclosure of pay ratios would build on already enhanced disclosure. But second, despite the provision of more powers and more information, and repeated prods from governments and regulators, asset managers have shown themselves to be a pretty weak force for pay restraint.
As I've argued before, giving shareholders prime responsibility for executive pay simply makes it likely that pay will be shaped in a way that asset managers think is reasonable, if they are motivated to engage at all. Asset managers have largely said structure (performance linkage etc) is important, not scale. This may or not be reasonable (I think not, given that the power they have derives from other people's money) but it certainly isn't in line with where the public is at.
This was always going to end badly. Otherwise smart people repeatedly said there's no sense in getting upsetting about the huge and growing rewards for a handful at the top because a) the amounts were small compared to overall company expenditure b) it was performance linked and c) shareholders gained from the "talent". This approach always misunderstood where other people were at, and that they might have different ideas. For a while it looked smart to make shareholders have responsibility for executive pay, and to promote policy to facilitate this, but the danger has always been that if shareholders didn't act this could pull the rug from under shareholder primacy itself.
I know this is just lefty nonsense coming from me, so it's worth reading someone from the world of finance make a lot of the same points here:
The UK’s big shareholders and the big boardrooms they are supposed to keep an eye on for us have had endless chances to have a go at fixing the pay problem themselves. They haven’t done it. Now the problem so bad that it looks as if a Tory government is going to have a go at fixing it for them. That’s a political shift that marks a major financial industry failure. And rather a shameful one at that.
Of course, May could still backtrack, maybe by consulting on these ideas and then ditching them when there is pushback. But even a consultation could be politically damaging is it sees some of those with a vested interest arguing against a fairly significant shake-up. I'm not sure the CBI will be putting a joint response in with the Investment Association again saying there isn't really a problem with exec pay, for example. And by opening up this argument, May is only going to take flak for caving into the donors if there is significant backsliding.
I blogged a while back about the need for Labour to set out something thorough in the area of corporate governance and company law reform. It's clear that this now needs to be done rapidly, and radically. The 1990s is over. It's time the Left started setting out a vision of corporate governance in the 21st Century.