Meet the new boss - same as the old boss?
We are slowly getting to understand Theresa May’s priorities
as prime minister. Obviously, Brexit is one of her biggest priorities. But we
know she also has strong views on subjects even closer to RM2’s business interests
such as executive pay and boardroom diversity, judging by her one and only
speech as Conservative Party leadership candidate before she was anointed as
the unchallenged leader.
On executive pay, she said on 11 July:
“There is an irrational, unhealthy and growing gap between what…. companies pay their workers and what they pay their bosses.”
This is borne out by data on pay differentials, which show
the average pay ratio between CEOs of FTSE-100 companies and the average wage
of their employees has risen to 147:1 in 2015. Between 2000 and 2013, the
median earnings of a FTSE-350 Company Director increased more than twice as
fast as median pre-tax profits at FTSE-350 companies and four times as fast as
their median market value.
Mrs May’s proposed remedies include making shareholder votes
on executive pay in public companies binding rather than merely advisory and
requiring greater transparency on bonus targets and pay ratios.
These reforms are clearly directed at large public companies
– what critics call the “ownerless corporations” - rather than at the
entrepreneurial private companies and owner-managed companies of the kind that
are clients of RM2.
By contrast, closely controlled proprietor-led private
companies with employee share schemes are often exemplars at aligning the
ownership interests of founders and employees, unlike their big public company
counterparts. Public companies could learn a lot by studying the incentive
practices of private companies, especially the tendency to award big ownership
stakes (rather than big cash pay) which have to be held for the long term and
which must be forfeited if the recipient leaves before a defined event, such as
an exit.
On boardroom diversity, Mrs May’s solution is more intriguing. In the same speech on 11 July, she said:
“The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders. In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So…. we’re going to change that system – and we’re going to have not just consumers represented on company boards, but employees as well.”
Already we are seeing a rear-guard action against
worker-directors being mounted by some business lobby groups. For example, the
Institute of Directors has suggested that, rather than have an employee on the
board, one of the existing NEDs should be nominated to be responsible for
representing employees’ interests. In fact, company law already requires all
directors to take into account the interests of multiple stakeholders including
employees and suppliers. So, the IoD’s suggestion is not really a significant
step forward.
It remains to be seen how far the worker-director idea
progresses. It works in German companies, which are famously long term in their
outlook, but can it be grafted onto the Anglo-American company model that
worships at the shrine of shareholder value? We shall see.
In the meantime, as with executive pay, public companies could learn a lot by studying the governance practices of private companies that are substantially employee owned: from significant employee ownership follows employee representation. That’s the direction of causality that seems more logical than board representation without employee ownership.