Governance Watch - Issue 57

Leadership

It can’t have been easy, running a business in the United Kingdom over the last three years and more, treading water in the swirling flood of uncertainty around the implementation of the vote to leave the European Union. We paused Governance Watch in August because we reasoned that everyone would be away, taking a break. But even those lucky enough to have done that via travel abroad will have had the reminder of turmoil constantly with them as they noted the value of sterling wobble and sink. There has been no break from the limbo in which business has been placed. With no clarity in sight at time of writing around the direction of our political leadership, it is more important than ever to listen to the murmurings in the socio-economic undercurrent of a divided country.


Executive Pay and Trust

If corporate governance is the essence of a business, the focus on it keeps coming back to executive pay. In August, we learnt that pay for FTSE 100 chief executives fell to its lowest level in five years, as the biggest UK companies reacted to “investor pressure over egregious rewards” according to the Financial Times. Median pay for a FTSE 100 chief executive was £3.4m in the last financial year, down from £4m in the previous period, according to a Deloitte analysis. That is the lowest level since 2014 when companies were required for the first time to provide a single figure for total pay, said the FT.

One large shareholder was quoted as saying “Pay has become a big issue for shareholders. We are never going to be able to put that genie back in the bottle.”

Media headlines often hide important truths found in the detail of a story.  Some 43 CEOs in the FTSE 100 saw their pay rise between 2017 and 2018, as did median gross weekly earnings for full-time employees, according to the Office of National Statistics (ONS). But the important point lies in the comparison: the average (median) CEO salary of £3.46 million a year is still more than 117 times that of the average (median) UK full-time worker earning £29,574.

In addition, 1,394 'key management personnel’ across the FTSE 100 are paid an average (mean) of £1.5 million each. “This highlights the disparity between top earners and the wider workforce and the need for greater scrutiny of executive pay in Britain’s biggest businesses” according to the annual analysis of executive pay from the CIPD, the professional body for HR and people development, and the High Pay Centre think tank.

For the first the CIPD and the High Pay Centre considered the FTSE 250, revealing its swings on executive pay to be smaller, with median pay at CEO level to be £1.58 million in 2018. It also found that 64% of workers agree that CEO pay is too high in the UK.

“Fairness is one of the biggest challenges facing society today. The gulf between the pay at the top and the bottom ends of companies is slightly smaller this year but it’s still unacceptably wide and undermines public trust in business. We must question if CEOs are overly focused on financial measures and are being incentivised to keep share prices high rather than focusing on the long-term health of their business. Being a custodian for the business and its people over the longer term must surely be a chief executive’s ultimate duty, rather than simply focusing on short-term gain” said Peter Cheese, chief executive of the CIPD. 

He made a point that is critical for a shift in mind-set at the top of many businesses, and across boardrooms and in remuneration committees. “After all”, said Mr Cheese, “success is the collective endeavour of the many, not just the few at the top. And that point has never been more important in these times of significant uncertainty.”

When the Chief Executive of CIPD says something, it can sound very different than when it is said by a politician, particularly one in opposition – and the devil is clearly in the detail. But with a mindful eye on being led by headlines, the FT coverage of a potentially changing political landscape in Britain explores measures that could be taken to address issues we have spent a lot of time debating over the last 5-10 years: executive pay, worker’s rights, fairness and equal opportunity, employee engagement and productivity, and the growing importance of stakeholders and their views on environmental, social and governance (ESG issues).

Businesses may prefer to lead on their response to some of these issues while the political debate and the uncertainty escalates.


Productivity

Concerns about productivity in the UK have been well- researched over years. The latest paper, from the Bank of England, will do nothing to ease them. Among its findings, “the Brexit process is estimated to have reduced UK productivity by between 2% and 5% over the three years after the referendum. Much of this drop is from negative within-firm effects, in part because firms are committing several hours per week of top-management time to Brexit planning.”


 Diversity and Inclusion

The distraction of Brexit has not done corporate governance at the UK’s biggest companies any good.

But progress on gender diversity across the entire FTSE 350 has been glacial, and equates to added reputational risk.

When it comes to inclusion, the picture is even worse. One of the many events in the last few days was the news yesterday by former education secretary and Conservative MP Justine Greening that she would not be standing again at the next election.

Speaking to the BBC's Today programme she said: "I will not be standing as a Conservative candidate at the next election. "I want to focus on making a difference on the ground on social mobility and I believe I can do that better outside Parliament than inside Parliament.”

Her words are a damning indictment of the current climate of British politics, and also a reminder to business that, for its own sake, it must be proactive on critical issues that need to be addressed to deal with at least some of the reasons for the Brexit vote.


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