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| MPs' corporate governance inquiry: what are the key issues? | |
| (35 minutes later) | |
| Parliament launches a series of hearings on reforming British boardrooms on Tuesday, as MPs pledge to ensure Theresa May fulfils her promise to clean up big business. | Parliament launches a series of hearings on reforming British boardrooms on Tuesday, as MPs pledge to ensure Theresa May fulfils her promise to clean up big business. |
| The business, energy and industrial strategy (BEIS) committee is collecting evidence for its own investigation into corporate governance, while the government’s own consultation is expected to start before Christmas. | The business, energy and industrial strategy (BEIS) committee is collecting evidence for its own investigation into corporate governance, while the government’s own consultation is expected to start before Christmas. |
| In her brief campaign to become Conservative party leader, May hit out against the gap between directors’ pay and the wider workforce, while raising the idea of putting workers on boards. | In her brief campaign to become Conservative party leader, May hit out against the gap between directors’ pay and the wider workforce, while raising the idea of putting workers on boards. |
| Iain Wright, chair of the BEIS committee, said: “I hope she’s not rolling back.” | Iain Wright, chair of the BEIS committee, said: “I hope she’s not rolling back.” |
| The submissions to the committee’s corporate governance probe offer ideas to tackle executive pay – the average boss earned £5.5m in 2015, up from just under £5m the year before – and provide clues to the other topics that will be debated in the months ahead. | The submissions to the committee’s corporate governance probe offer ideas to tackle executive pay – the average boss earned £5.5m in 2015, up from just under £5m the year before – and provide clues to the other topics that will be debated in the months ahead. |
| Scrap the current rules | Scrap the current rules |
| Pay directors in cash and scrap all the complicated bonuses paid in shares is the radical idea put forward in one submission by the Institute of Business Ethics (IBE), a charity set up 30 years ago. It calls for cash to be the main basis for pay. Directors should use some of their cash to buy shares which they must hold onto after they leave. Receiving dividends on their shares will make them focus on the long-term health of the company. | Pay directors in cash and scrap all the complicated bonuses paid in shares is the radical idea put forward in one submission by the Institute of Business Ethics (IBE), a charity set up 30 years ago. It calls for cash to be the main basis for pay. Directors should use some of their cash to buy shares which they must hold onto after they leave. Receiving dividends on their shares will make them focus on the long-term health of the company. |
| Cap pay | Cap pay |
| Fund managers traditionally shy away from setting out how much directors should be paid but there are signs that some are ready to intervene. Hermes has suggested a limit could be achieved by requiring companies to set out the maximum the chief executive could receive each year. The UK Shareholders’ Association, which represents private investors, suggested any bonuses should be limited to 50% of salary. The TUC also suggests bonuses should be 10% of the total pay package. | Fund managers traditionally shy away from setting out how much directors should be paid but there are signs that some are ready to intervene. Hermes has suggested a limit could be achieved by requiring companies to set out the maximum the chief executive could receive each year. The UK Shareholders’ Association, which represents private investors, suggested any bonuses should be limited to 50% of salary. The TUC also suggests bonuses should be 10% of the total pay package. |
| Pay ratios | Pay ratios |
| Legal & General Investment Management (LGIM), a big City investor, has backed publishing the ratio between the chief executive’s pay and that of the median employee but does not set an ideal gap. The High Pay Centre is setting up a “40 times” club, referring to a specific ratio of executive pay to the wider workforce. Trade union Unite wants a 10:1 maximum pay ratio and also calls for a ratio to be published for the lowest paid employee. | Legal & General Investment Management (LGIM), a big City investor, has backed publishing the ratio between the chief executive’s pay and that of the median employee but does not set an ideal gap. The High Pay Centre is setting up a “40 times” club, referring to a specific ratio of executive pay to the wider workforce. Trade union Unite wants a 10:1 maximum pay ratio and also calls for a ratio to be published for the lowest paid employee. |
| Workers on boards | Workers on boards |
| Arguments against this proposal include creating a two-tier board where sensitive matters are discussed by a core group and introducing a special interest on to the board. LGIM favoured making a director a so-called employee advocate. The British Bankers’ Association was most dismissive, arguing for surveys and employee forums. Helena Morrissey, chair of Newton fund managers, said she had met workers who could be “fantastic” board members. She liked the idea of a worker on boards’ pay committees. John Lewis went further, as one would expect for an employee-owned company, and advocated worker ownership of businesses. | Arguments against this proposal include creating a two-tier board where sensitive matters are discussed by a core group and introducing a special interest on to the board. LGIM favoured making a director a so-called employee advocate. The British Bankers’ Association was most dismissive, arguing for surveys and employee forums. Helena Morrissey, chair of Newton fund managers, said she had met workers who could be “fantastic” board members. She liked the idea of a worker on boards’ pay committees. John Lewis went further, as one would expect for an employee-owned company, and advocated worker ownership of businesses. |
| Binding pay vote | Binding pay vote |
| Shareholders get two votes on pay: one on the current year’s pay amount which is advisory and one on a three-year pay policy which is binding, which means the company has to revise the policy if it loses the vote. May has advocated another binding vote which the UK Shareholders’ Association said was needed for the system to work. Morrissey was also in favour. The CBI argued shareholders would be less willing to oppose a pay deal if the vote was binding and that such votes should only apply to repeat offenders. The IBE was most radical, calling for no payment under schemes that cannot be understood when the payment is awarded. | Shareholders get two votes on pay: one on the current year’s pay amount which is advisory and one on a three-year pay policy which is binding, which means the company has to revise the policy if it loses the vote. May has advocated another binding vote which the UK Shareholders’ Association said was needed for the system to work. Morrissey was also in favour. The CBI argued shareholders would be less willing to oppose a pay deal if the vote was binding and that such votes should only apply to repeat offenders. The IBE was most radical, calling for no payment under schemes that cannot be understood when the payment is awarded. |
| Diversity | Diversity |
| A read through the submissions to the committee so far shows that breaking free from white, middle-aged male groupthink is almost universally popular. The Institute of Directors criticises companies for rejecting alternative voices at the risk of stagnation and calls for younger directors. LGIM opposes quotas but wants the chairman to push for a greater mix of ethnicity, skills and background. The TUC calls for mandatory quotas for women. The Campaign for Merit in Business has a different view, asserting the diversity drive is “anti-male” and asking why the government does not encourage more women in sewage work and bomb disposal. | A read through the submissions to the committee so far shows that breaking free from white, middle-aged male groupthink is almost universally popular. The Institute of Directors criticises companies for rejecting alternative voices at the risk of stagnation and calls for younger directors. LGIM opposes quotas but wants the chairman to push for a greater mix of ethnicity, skills and background. The TUC calls for mandatory quotas for women. The Campaign for Merit in Business has a different view, asserting the diversity drive is “anti-male” and asking why the government does not encourage more women in sewage work and bomb disposal. |
| BHS question | BHS question |
| The IoD argued no new rules are needed in the wake of the BHS scandal and that imposing burdens on small companies would be bad for the economy. But the IBE said private companies should state their commitment to the law requiring directors to look out for employees, suppliers, customers and wider society. | The IoD argued no new rules are needed in the wake of the BHS scandal and that imposing burdens on small companies would be bad for the economy. But the IBE said private companies should state their commitment to the law requiring directors to look out for employees, suppliers, customers and wider society. |
| Fill pension deficits | Fill pension deficits |
| The collapse of BHS also exposed concerns about how companies deal with pension deficits. The IBE suggested that when a company has a shortfall in its pension scheme, any bonuses and salary increases to directors should be blocked unless there is an agreement in place with the Pensions Regulator on how the deficit will be closed. | The collapse of BHS also exposed concerns about how companies deal with pension deficits. The IBE suggested that when a company has a shortfall in its pension scheme, any bonuses and salary increases to directors should be blocked unless there is an agreement in place with the Pensions Regulator on how the deficit will be closed. |
| Succession planning | Succession planning |
| Sorting out the next boss well in advance could be one way to keep pay under control. “An executive director can claim they have received a better offer elsewhere, and boards might feel vulnerable when they know that several companies in their sector are looking for a finance director or a CEO,” LGIM said. | Sorting out the next boss well in advance could be one way to keep pay under control. “An executive director can claim they have received a better offer elsewhere, and boards might feel vulnerable when they know that several companies in their sector are looking for a finance director or a CEO,” LGIM said. |