‘No credible link’

Radical action must be taken to overhaul Britain’s system of corporate governance, a committee of MPs has recommended in a report published today (April 5).

Among its many recommendations, the business, energy and industrial strategy select committee called for greater gender and ethnic boardroom diversity; for executive/worker pay ratios to be published; and for an all-out ban on “long-term incentive plans” (LTIPs), which have contributed to runaway executive pay.

The committee also reiterated the call for putting workers on remuneration boards – a move Unite has long been calling for in addition to having workers on company boards.  Prime minister Theresa May had initially said she would back such plans before suddenly taking a U-turn on the issue.

MPs pointed to recent scandals involving major companies such as Sports Direct, which Unite found to be paying its warehouse workers below the minimum wage, and BHS, whose chief executive Sir Phillip Green was accused of “systematic plunder” of the company which led to the company’s collapse and the loss of 11,000 jobs.

These scandals, the MPs argued, have demonstrated the need for government action.

The select committee chair, Labour MP Iain Wright, said that rogue businesses must be reined in.

“Successful, productive and profitable companies cannot be disconnected from society,” he noted. “Businesses have wider responsibilities than short-term profits; they have a responsibility to their employees, their suppliers, and to the communities in which they operate.

“Executive pay has been ratcheted up so high that it is impossible to see a credible link between remuneration and performance. Pay must be reformed and simplified to incentivise decision-making for the long term success of the business and to pursue wider company objectives than share value.”

“The collapse of BHS highlighted the damage which private companies can do,” he added. “A new Code for private companies will help to ensure that high standards of corporate behaviour are observed by our leading firms, improving their public reputation and making them more attractive to investment.”

‘Bad behaviour’

TUC general secretary Frances O’Grady noted that “British people are fed up with the bad behaviour of big business”.

“Workers are getting a raw deal, and our economy is harmed by short-term thinking in the board room,” she said. “Reform is badly needed, and the government should take up many of the excellent ideas in this report.

“We welcome the committee’s recognition of the value of workers on boards, bringing a broader boardroom perspective and strengthening long-term focus. But it’s unlikely to become ‘the norm’, as the committee hopes, unless there is a legal requirement. We encourage the Prime Minister to stick with her original promise to require companies to put workers on boards.

O’Grady backed the committee’s recommendation that employee representation on remuneration committees be in the Corporate Governance Code. She also agreed with scrapping of the LTIP system, which she said, “failed to link pay to long-term company objectives”.

“The TUC strongly backs the proposal to give the Financial Reporting Council (FRC) the power to take legal action when companies fail in their duties to workers and stakeholders,” O’Grady added. “This would make a big difference in holding firms to account for their failures. Representation on the FRC’s board should also be expanded to include key stakeholder groups, including workers.”

Among the most radical of the recommendations from the committee was that women should make up to 50 per cent of FTSE 350 and all listed company boardrooms by 2020 – a significant increase from guidelines now which aim to have women make up a third of boardrooms by the same year.

The proportion of women directors in FTSE 100 companies in 2015 was just 26 per cent.

The committee also backed plans to increase ethnic diversity in company boardrooms.

Wright said that too often people in boardrooms “seem to be drawn from the same cosy club.”

“We do not recommend tokenism, but we strongly believe a diverse board both better reflects the society in which the firm operates and provides greater challenge to the strategy and decisions taken, which should improve company performance and profitability,” he noted.

‘Remove the barriers’

‘Unite national officer for equalities Siobhan Endean welcomed the plans to increase number of women in boardrooms but in order to achieve this, she said, businesses need to “work hard to remove the barriers to women as a key part of their business objectives.”

She explained that, for example, there still remains resistance within businesses to flexible working arrangements, part time working and job share, as well as occupational maternity pay and leave and paid parental leave.

“If we have more women at all levels of businesses then I hope that would lead to a better understanding of the barriers women face at work, but all levels of management need to be trained in equality if it’s going to make a difference to all women at work,” Endean said.

A ban on long-term incentive plans (LTIPs) was likewise seen as a strong, forward-thinking recommendation put forward by the committee. The vast majority of scandals involving sky-high executive pay have involved such LTIPs, which constitute ÂŁ1.5m of the average ÂŁ4.5m executive annual pay packet and, despite the name, do little to incentivise long-term thinking.

“The committee’s recommendations are welcome and will serve as a first step in tackling the yawning gap between executive and worker pay,” said Unite general secretary Steve Turner.  “But recommendations are not enough – for these proposals to have teeth, they must be adopted by the government and imposed with the full force of the law.

“Putting forward ‘best codes of practice’ we know simply does not work,” he added. “Bad businesses will only have the best interests of their workers at heart if they are forced to.”

Turner explained that tackling runaway executive pay is a complex problem that requires coordinated effort from a reinvigorated trade union movement.

“Growing inequality over the past 30 years has its parallel in a weakened trade union movement and the collapse of collective bargaining,” Turner said. “A return to a strong, well-organised and effective trade union movement coupled with sectoral collective bargaining is the answer. A lone worker on a remuneration board is a red herring and publishing the executive-worker pay ratio in annual reports will identify the obscenity [of executive pay] but won’t address it.”

“It is a failure to introduce proper, effective and enforceable structures of corporate governance — structures that give workers a powerful collective voice in the companies they work for — that is at the heart of runaway corporatism both here at home and across much of the globe.”