Hard Hitting BEIS Report on Corporate Governance and Pay

The BEIS Commons Select Committee have today published a strongly worded report on Corporate Governance after its recent hearings on the subject. Here are some of the key points they make:

  1. They agree with the Prime Minister that high levels of executive pay need to be tackled “for the benefit of society as a whole”. They forcefully recommend that Long Term Incentive Plans (LTIPs) should be abolished as soon as possible because they create perverse incentives and are often a way to conceal high headline pay levels. They suggest pay structures should be simplified and deferred stock options should replace LTIPs.
  2. They support the “comply or explain” basis of the UK Corporate Governance Code but they wish to see some changes made to it so as to improve shareholder engagement and make non-executive directors more accountable plus more powers be given to the FRC so as to assist. They are concerned that Section 172 of the Companies Act which concerns the obligations of companies to their stakeholders is being ignored. They think boards should be required to explain how they have considered the issues.
  3. They came out in favour of “Stakeholder Panels” to assist boards and improve engagement. This is somewhat disappointing when ShareSoc has suggested Shareholder Committees would be better (they mention the actions by ShareSoc and UKSA in respect of RBS). Stakeholder Panels are a very watered down version and in our view are not likely to prove effective in influencing boards although other witnesses supported them. Interestingly they mention that several witnesses mentioned the possibility of “digital engagement via online forums” which would be a novel approach.
  4. They do not directly support having workers’ representatives on boards although they do suggest that employees might be considered for the roles of Non-Executive Directors, and that employee representatives should be appointed to Remuneration Committees.
  5. They support the publication of annual pay ratios, but they are opposed to the introduction of annual binding votes on pay simply because past experience of such votes does not suggest they would be effective in controlling pay. However, they do suggest that a binding vote on pay be invoked in the following year if more than 25% of votes are cast against the Remuneration Report (presumably in addition to the three yearly binding policy vote already present). They also suggest a rule that the Chairman of a remuneration committee be required to resign if pay proposals do not achieve the support of 75% of shareholders.
  6. They suggest more disclosure is made about advisors engaged by companies and their pay.
  7. They propose that the appointment of new directors be explicitly done by open advertising or the use of external search firms rather than the currently common “informal” which is surely a positive move and in accordance with ShareSoc’s recommendations.

My personal comments: In summary they are not proposing any radical reforms to the whole approach to UK corporate governance, but they are putting forward some significant improvements. But they are proposing more reporting and more FRC regulation so bureaucracy will be increased further which may not be helpful and will certainly add to costs. In addition the use of “Stakeholder Panels” would add to the corporate governance burden while how they would operate and their benefits is not actually very clear. They could just turn into “talking shops” with no real impact on the behaviour of directors or influence over their recruitment.

But the scrapping of LTIPs and the other proposals on remuneration are certainly positive recommendations.

They unfortunately failed to tackle one reason why votes on pay have not been as effective as hoped. Namely that private shareholders are mainly disenfranchised and do not vote. In addition fund managers do not represent the views of their underlying beneficial owners in the funds they control.

No doubt there will be formal public consultations on these proposals if the Government adopts the Committee’s recommendations, to which ShareSoc will respond. So if you have any comments on them, please let us know by adding your views to this blog post.

The full report of the Business, Energy and Industrial Strategy (BEIS) Committee is available here: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/702/702.pdf . It’s well worth reading.

Roger Lawson

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2 thoughts on “Hard Hitting BEIS Report on Corporate Governance and Pay

  1. Seems to me the principle of aligning executives’ and shareholders’ interests is a good one, but LTIPs have never achieved it. If the share price goes up over a defined time, the directors and shareholders both get rich; if it falls, the directors just get rich more slowly, whereas shareholders get poorer.

    The solution is simple. All main board roles should be openly advertised and anyone should be invited to apply. Candidates should pitch on the basis of their skills, experience and strategy, but also on what they want to be paid and, crucially, what value of the company’s shares they propose buying on day one to show faith in their own leadership. If they don’t have the cash to pay upfront, the company lends it to them, so they work salary-free until the debt is paid.

    The blowhards and spinners who don’t really believe they can add value would soon be outed, while the optimists who have mistaken faith in their own abilities would soon be confronted with the truth. Meanwhile those rare directors who genuinely transform businesses would gain the wealth they deserve.

    Naive? Crazy? It’s how small businesses work, so nothing radical.

  2. Pingback: Perverse LTIPs and Alliance Trust (ATST) | ShareSoc Blog

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