Sunday, 10 June 2018

Pay ratios - an important step forward

Tomorrow will see the introduction of regulations that will make it mandatory for larger listed companied to disclose the ratio between chief executive salaries and the average pay for employees of the same firm. Although the UK has actually been beaten to this reform by the US of all places, this represents an important development for a number of reasons.

First, it is a shift away from the centrality of shareholder interests. I am unclear about the extent to which Conservative policy wonks are aware of this (or care either way) but if you've followed this debate you should know what I mean.

I don't think many people seriously believe that the disclosure of ratios will lead to the creation of greater returns for shareholders. Nor is the policy aimed at the issue which most shareholders have focused on - tying executive reward to shareholder returns. Rather this policy is all about intra-firm inequality and relative reward. Some shareholders (asset managers) care about these things, many do not. But essentially their support or opposition to the policy is taken to be far less important than would have been the case 5 years ago.

We can see the shift in focus too in the expected revised requirement for demonstrating how the range of stakeholder interests are taken into account by directors. Employees are once again highlighted as an important group. I know for many people on the Left these will seem like very minor tweaks but they do matter.

And that's partly because, secondly, these reforms represent a defeat for the corporate governance mainstream. Most people in the microcosm I inhabit still adhere to the 1990s vintage view of the world, and the policies that flow from it. This is built around disclosure and shareholder empowerment. In that cluster of policies pay ratios make no sense. And it was only a few years ago that major shareholders and their representatives were publicly opposed to pay ratio disclosure. Many still believe the whole exercise is pointless and/or an illegitimate intervention in the shareholder-company relationship. However, some have swung to support ratio disclosure, probably in part because they don't want to be too far out of line with the government, and this isn't a hill worth dying on. Nonetheless it is a defeat for the mainstream and a policy that comes very clearly from the Left is being put in practice by a Conservative government.

Which leads me on to the third reason why this policy is important - it has shifted the centre of gravity in terms of what is "reasonable" to ask for in this area. Again, it wasn't that long ago that arguing for disclosure of pay ratios was very much a left-wing position - and an aspirational one at that. Now that it is being put into practice pay ratios will shortly become the status quo. That means that on the Left we can now use this as a jumping off point for more radical policies. In my opinion we should not underestimate how important and influential having a measure of intra-firm inequality embedded into corporate disclosure will be in terms of shaping people's thinking about a) what matters in this field and b) what might be politically achievable.

It's taken a long time to get here, and there is a lot more to do. For instance we have to push on worker representation in corp gov too - the government lost its nerve, but the door has been left ajar. But the introduction of pay ratios is a win, end of. And it's the start of something.

No comments: