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Package of reforms aimed at tackling executive pay excess and giving workers a voice

Posted on 29 August 2017 by Asa Waring, Will Winch, Jennifer Millins & Greg Campbell

Package of reforms aimed at tackling executive pay excess and giving workers a voice

Business secretary Greg Clark has today set out the government's plans to reform corporate governance at the UK's largest companies, as part of its response to its green paper consultation (as we reported here). The new laws, expected to come into force by June 2018, are intended to make such companies more transparent and accountable to their employees and shareholders.

The proposals are significantly less wide reaching than had been originally suggested, but one proposal which has made it into the package of reforms is the requirement for listed companies to publish pay ratios between chief executives and their average worker. Recent estimates show that the average executive earns 130 times more than the average worker (up from 40 times 20 years ago) and the government has expressed a commitment to tackle excessive pay at the top. Forcing boards to publish, and explain, the ratio, particularly against the performance of the business and the rewards to the workforce as a whole, may help shareholders take a more informed view as to what level of remuneration may be appropriate. There are no formal or informal targets, or legal consequences linked to the ratio, so whether the obligation to publish the ratio will help reduce the gap is another matter. And as with the gender pay gap reporting, it is perhaps the reputational risk that could provide the biggest motivator for change.

Another transparency measure is a new public register, said to be the world's first, of listed companies where 20% of investors have objected to executive annual pay packages. The new naming and shaming scheme will be set up in the Autumn and will be overseen by the Investment Association. Although the non-binding voting on executive pay already gets reported in the press, particularly where there have been signs of shareholder rebellion, the existence of an easily accessible public register may increase the pressure on companies, despite the fact that there will be no mechanism for enforcement. However, the government has said that if companies fail to take steps to address shareholder concerns over executive pay it will "consider further action at a future point."

In a much watered down commitment to put workers on company boards, another proposal announced today gives listed companies three options (on a "comply or explain" basis): to either assign a non-executive director to represent employees, create an employee advisory council, or nominate a director from the workforce. The importance of having an effective worker voice as part of good corporate governance was emphasised in the Taylor Review of Modern Working Practices (the publication of which we commented on here) and there is growing support for greater involvement of employees in the decision making process of businesses. Not only does this allow for more diverse voices with different backgrounds to be heard at the highest level (enabling more balanced decisions and, it is hoped, providing a break on excessive executive pay) but it may also encourage better engagement by the workforce, which has been linked with improved performance and higher productivity.

Far from requiring workers on boards (as is the case in many other European countries, reported in our article here), the proposals will allow companies to choose which of the three options for worker engagement works best for them, and report on their actions for taking account of stakeholder's interests, including employees'. Leaving aside potential issues with each option, will this proposal amount to no more than a box ticking exercise, or will it provide the incentive for companies to put effective measures in place to give employees a voice?  Only time will tell.