In Theresa May's exec pay crusade, the devil will be in the detail

 
Tim Bush
Home Secretary Theresa May Launches Her Bid For The Conservative Leadership
May launched her exec pay crusade during the summer leadership contest (Source: Getty)

It’s positive to have a Green Paper to allow a proper debate; the detail of legislation – and amendments to it - will matter a lot. It will be particularly interesting to see the detail of how extending the “comply or explain” Governance Code to private companies will operate.

The system presently works with public companies on the basis there is separation of ownership and control and external shareholders are expected to use their powers to deal with issues of the board’s own making.

But in the case of most private companies there is not that separation, directors – or at least one of them – will be in control; there aren’t external shareholders with the power to police things.

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Indeed one of the problems with Sports Direct, which is listed and already subject to the Governance Code, is that it is too much like a private company, with a controlling party calling most of the shots.

Whilst a focus on improving the governance of private companies is positive, PIRC’s position is that there need to be clearer ways to enforce existing duties of directors under company law, possibly via an independent Companies Commission.

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The proposals for employees on board and publishing of the ratio of employee to executive pay are things that PIRC has long called for and welcomes.

The indications of reform of executive pay appear promising. Since 2013 there has been a binding vote on pay policy with the outcome vote being advisory.

Making the outcome vote binding suggests that the government’s view is that the binding vote on pay policy - introduced in 2013 hasn’t been effective in reining back the amounts paid. i.e. too many shareholders have voted in favour of pay policies that still give undeserved outcomes; the quantum is too high.

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With a vote on the pay outcome itself, there is therefore a question whether the legislation will make the binding policy vote redundant. A criticism of PIRC has been the design of schemes and their complexity.

High awards have been the result of pay policies that depend on the complexity of schemes and have become disconnected from basic performance. It may therefore be the case that a vote on a transparent outcome will mean that there should be less be incentive to mask excessive pay policies beneath complexity.

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