Governance rejig gives U.K. workers small megaphone

New guidelines give staff in large companies the chance to sense-check executive pay

Governance rejig gives U.K. workers small megaphone

By Aimee Donnellan

LONDON (Reuters Breakingviews) - Britain’s latest corporate governance rejig is giving United Kingdom workers a small megaphone. New guidelines give staff in large companies the chance to sense-check executive pay. It’s a belated acknowledgement that employees as well as shareholders deserve a say on how companies are run. Identifying the problem is only a start, though.

The U.K.’s Financial Reporting Council gives large listed three options for listening to their workers: they can appoint a worker to the board, nominate a director who will represent staff or create a separate employee council. The modest pay packets of ordinary labourers should also be considered when the board is doling out executive rewards, according to the guidelines.

A shake-up was overdue. It’s 26 years since the Cadbury report set out suggestions of how a well-run company should operate. Back then, the focus was rightly on protecting shareholders by strengthening the independence of boards and blocking powerful executives from grabbing the chairman’s seat. The Greenbury report followed by requiring companies to disclose executive pay.

Today, however, companies and their shareholders face broader criticism. Executives receive ill-timed rewards like the incentive package awarded to the chief executive of housebuilder Persimmon, which could have been worth 110 million pounds. Women are still woefully under-represented in senior positions. And directors of corporate failures like Carillion and BHS walk away with few repercussions.

The new corporate governance code attempts to give directors more responsibility for corporate culture. It gives them the power to block egregious bonuses when a company is in trouble. Meanwhile, executives who retire will have to wait five years for their share awards, up from three years today. That increases the chances that bosses who push through ill-advised strategies will suffer the financial consequences of their actions.

Arguably the code does not go far enough. Companies are likely to choose easiest and least demanding option for engaging with employees. And the requirement that companies which diverge from the guidelines merely explain their reasoning leaves plenty of scope to dole out hefty executive rewards, or ignore workers in favour of shareholders. But given that large institutional investors like BlackRock have already backed some of the code’s demands, those who opt out will have few places to hide.

 

CONTEXT NEWS

- Britain’s Financial Reporting Council said on July 16 that companies in Britain must strive to rein in excessive executive pay and make boards more diverse under its new corporate code.

- The U.K. regulator updated its code of corporate standards for publicly listed companies, which must comply with the rules or offer an explanation to shareholders why they have chosen not to.

- The updated code extends the timescale for releasing shares awarded under long-term incentive schemes. Companies can now withhold share bonuses from executives for five years or more, instead of the previous three-year restriction.

- It also includes a provision for greater board engagement with the workforce to understand their views – aimed at reinforcing an existing provision in law since 2006. The code emphasises the need for boards to refresh themselves, become diverse, and plan properly for replacing jobs. It says companies should give a public explanation in the event of a board chair serving more than nine years.

- Company remuneration committees should also take into account workforce pay when setting director pay, according to the code.

 

Latest stories