Britain's new Prime Minister Theresa May has created a big challenge for herself in proposing wide-reaching reform of the way companies are run. A close look at the existing Company Law, however, could help her deliver an important part of this agenda without a large swathe of new rules and regulations.
Her suggestions that worker representatives might sit on boards and that shareholders should have even more voting power over pay sound strange coming from a Tory. But May is shrewdly acknowledging that the Brexit vote reflected a deep underlying desire for a more inclusive society and an end to the self-serving behaviour of Britain’s elites.
Of course, the antics of people like Sir Philip Green at BHS and Mike Ashley at Sports Direct are not typical of business as a whole, but they have pushed a growing consensus that firms must serve a social purpose if they are to earn their licence to operate. They can no longer be just about making money for shareholders and bonuses for their bosses.
The question is how to move forward in a practical way. May is right that we need to continue to drive for diversity on boards, but simply appointing worker representatives ignores other stakeholders like customers and suppliers, and would undermine the unitary board in which all directors share collective responsibility for decisions. A single worker director imposed under sufferance could be very isolated and, in any case, would be unable to represent a large, often global, diverse workforce.
Another proposal has been that a specific director should be given formal responsibility for stakeholder issues, but this carries much of the same risk.
It would be better to focus on the existing directors’ duties as set out in Section 172 of the Companies Act. These enjoin directors to take account of stakeholder interests, including staff, customers and employees, and to take a long-term view. Our experience suggests that many directors are simply unaware of these provisions. So a useful start could be to require boards of all listed and large unlisted companies to report annually on how Section 172 is reflected in their skills, priorities and decision-making. This would greatly increase stakeholder consciousness without requiring complex new regulation because it is based on existing law.
To back that up, the UK Corporate Governance Code could be changed to encourage companies to develop and publish their own codes setting out their values and how staff should behave, as many larger ones already do. Larger firms could also be encouraged to have board level committees focused on reputation and conduct risk. Unlisted companies should come under greater pressure to conform with the Governance Code.
All this can be done with minimal new regulation, but remuneration is another matter. An additional binding vote on executive pay is just tinkering with a broken system. Shareholders remain reluctant to get to grips with the issue. They have consistently failed to vote against the re-election of remuneration committee chairs who let the side down. Recent reform proposals from the Investment Association were feeble.
Nor does another new idea from the MP Chris Philp offer much help. He suggests the creation of special shareholder committees to control remuneration and new appointments to the board. This is a Swedish idea whose purpose there is to give minority shareholders a bigger say in companies where there is one dominant shareholder. Ownership of UK companies is more diverse, however, and these committees are unlikely to work when over half the shareholders of UK companies reside abroad.
We need more radical reform, which effectively means outlawing options and other fancy dilutive share schemes, leaving the focus on cash and on shares bought at market prices. These shares could then be held for the long term even after the executive has moved on. With the right safeguards around dividend cover, executives could enjoy a sizeable dividend income over time, which would make them less reliant on short-term bonuses.
The corporate sector would then have a strong incentive to make a powerful contribution to Britain’s long-term economic success. Remuneration is where May should focus her legislative firepower.