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.