Voluntary action on executive salaries may fall short

Alan Delaney of Maclay Murray & Spens LLP

Coming hard on the heels of the publicity around companies such as BHS and Sports Direct and amid public anger over executive salaries, the Government’s Green Paper on Corporate Governance Reform has landed on a stage set for radical action. Problem is, the proposals are barely strong enough to make any impact at all.

The headlines that followed publication of the Department for Business, Energy & Industrial Strategy’s consultation in November focused on what wasn’t there: in particular, suggestions that firms should be forced to include workers on their boards had clearly been watered down. Instead, the Government proposes two far less radical options. One is to designate existing non-executive directors to ensure that the voices of key interest groups, especially workers, are heard at board level. The other centres on the creation of stakeholder advisory panels, including employees.

However, both options would leave a company’s leadership free to decide on what and when to consult the workforce. For those already enjoying a good relationship with workers and genuinely keen to have their input in leadership matters, that may well be frequently and across a broad range of issues. But it’s hard to see less enlightened bosses paying more than lip-service to such a system.

An even bigger issue for the Green Paper is executive pay, amid a widespread perception that it has become increasingly disconnected from the pay of ordinary working people. There had been some expectation that the Government might look to force firms to publish the ratios comparing CEO pay to pay in the wider company workforce.

However, having raised expectations, this proposal may never see the light of day. The Government expresses concern that a simple comparison of CEO pay to the median salary in an organisation might well produce misleading results, or even lead to the outsourcing of lowerpaid jobs – and no real alternative is put forward.

Large, privately held businesses, in particular, have relatively light obligations when it comes to transparency, and there have been calls for them to meet higher minimum corporate governance and reporting standards more in line with their quoted peers. But the Green Paper merely suggests the adoption of a code of practice on a voluntary basis which, as with worker representation, is likely to only be implemented at companies which already favour an open approach.

The Green Paper does note that it is not only social justice campaigners concerned about high pay in Britain’s boardrooms: many investors have been speaking out too, in favour of more transparent ways of incentivising long-term performance.

Companies already grappling with the uncertainties of Brexit will perhaps be relieved the Green Paper proposes largely voluntary measures and steers clear of radical reform. The risk, however, is that these proposals aim so low that there will be demands for further change: we will get a better idea of public feeling once consultation closes on 17 February.

The whole point of the Green Paper was to provide reassurance that large companies are being run with a recognition of their responsibilities to employees and other stakeholders. Most businesses and business leaders want to be perceived that way, too, and many top-performing companies will already have in place arrangements to do so. However, from the perspective of driving increased public confidence in corporate behaviour, it remains to be seen whether voluntary schemes will deliver.

Alan Delaney is a director in the employment, pensions and immigration practice of Maclay Murray & Spens LLP.