Our new Prime Minister elect's trenchant comments on
corporate governance should usher in some fresh thinking on issues
such as remuneration and board composition.
It is fantastic to see corporate governance appearing high on
the political agenda. ICSA: The Governance Institute, as the
professional body for governance and with an obligation in our
Royal Charter to lead 'effective governance and efficient
administration of commerce, industry and public affairs', will
continue to be at the forefront of corporate governance thought
However, some of the issues that we face are structural and not
susceptible to quick and simple solutions. A fresh look at the
boardroom is long overdue and although I entirely agree with the
objectives that underpin Theresa May's proposals to address the
issues of executive pay and stakeholder engagement, I cannot help
wondering whether these changes will have the anticipated effects.
Much will depend on how they are implemented.
It is painfully clear that the current approach of reporting and
voting on remuneration policies has not prevented the escalation in
directors' fees and bonuses, and ICSA has consistently argued
that some pay decisions simply do not bear scrutiny. We agree that
there is a need to rein in executive pay, but it is not clear that
increasing the number of binding votes – whether on policy or
implementation − will be the most effective way of doing
ICSA would favour an alternative approach of encouraging
shareholders to make greater use of their existing rights to vote
directors off the board, something that they have been rather
reluctant to do. For example, in the five largest votes against the
remuneration report that we have seen in 2016 to date, the average
vote against the report was 54.08% and the average vote against the
chairman of the responsible remuneration committee was only
If the individuals responsible for remuneration policies felt
there was a real risk of them losing their seats on the board if
they approve an outcome to which investors are likely to object,
this might focus their minds rather more.
It may also be necessary to consider the mechanism by which
executive pay is governed. The role of investors is to look after
the long-term interests of their clients and beneficiaries, not to
represent public opinion. The two may often coincide, but investors
do not have a duty to act in the public interest.
That job belongs to regulators and governments and there are
some very direct ways in which they could intervene to reduce pay
– wage caps, for example. However, many of those possible
actions are considered politically unpalatable and have huge
potential for unintended consequences.
Clearly there is a need for the boards and remuneration
committees of many companies to pay more attention to the views of,
and impact on, their employees and customers. Although appointing
directors specifically to represent those groups might achieve
that, it is not clear how that could be compatible with the
statutory duty of the board collectively to promote the success of
the company for the benefit of its members as a whole. It may be
that there is a need to revisit the definition of directors'
duties in company law to ensure that the interests of these groups
are given due weight.
A more practical solution might be to reflect the position with
whistleblowers, where one director has a special responsibility
towards them, and create special responsibilities for one or more
directors, ideally non-executive directors, to have regard to the
interest of particular stakeholders – for example, employees
and consumers – in addition to their normal statutory
As I said, these are not simple issues to resolve, but the ICSA
policy team are doing some work on the future of governance in
which we hope to be able to set out some helpful ideas.
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