Inequality
OECD figures suggest that the UK has among the highest levels of income inequality in the European Union (as measured by the Gini coefficient), although income inequality is lower than in the United States, says a research briefing from the UK Parliament in March 2019. This week the think-tank the Institute of Fiscal Studies (IFS) announced the IFS Deaton Review, a major five-year investigation into whether there is a systemic bias in the country towards inequality. It has enormous implications for our thinking on a wide range of things, from public policy to societal behaviour and to the design of corporate governance and attitude to corporate behaviour.
“The multidimensional nature of inequality is among the most contentious issues of our times. It frames the increasingly vehement debate about the distribution of income and wealth and the relationships between this and other inequalities such as gender, ethnicity and disability” said Tim Gardam, CEO of the Nuffield Foundation, a charitable trust for social well-being, which is to fund the project. “It informs the growing anxiety over generational and geographical divisions and is fundamental to our understanding of concepts such as fairness, rights and identity” he added.
“Fairness” is a word we have heard increasingly from our politicians, less trusted by the UK public than its businesses, as is evident in the findings of the Edelman 2019 Trust Barometer, published before the last four months of continuing paralysis around the UK’s referendum decision to leave the European Union. Some of the consequences of that were mentioned in the last Governance Watch.
Edelman finds in its research that how a business treats its employees is a key indicator of trustworthiness. “The reputational impact of internal issues is becoming increasingly external” it states. A step on from that thought to using the morally emotive word “fairness” is just a big step, not really a leap. And yet “fairness” is often derided in our use of it in the United Kingdom, in part because it is assumed to be inconsistent with capitalism as we know it, and partly because it is diluted when it is bandied about without delivering on it.
This week we had a good demonstration of “fairness” in play in the UK, however, when the boss of retail chain Richer Sounds decided, on turning 60, to give more than 500 staff a 60% stake in the business. This amounts to £1,000 for every year spent at the firm, or an average windfall of £8,000. Julian Richer, who founded his business when he was 19, will use £3.5m of his £9.2m stake for the cash payments.
Of course, as the interviewer on BBC Radio 4’s Today programme felt compelled to point out – Mr Richer has no shareholders. But Professor Sir Angus Deaton, who is to lead the inequality review for the IFS, spoke on the same programme this week about looking at the issues of “those who take from those who make.”
We continue to be perplexed about the UK’s “productivity puzzle”, which puts it at the bottom of the G7 League table, and yet we have to date persisted in not joining up the dots to consider systemic reasons for what lies at the heart of it.
Executive Pay
In one of the biggest investor revolts in recent years, 42% of the shareholders in the insurer Standard Life Aberdeen voted against the remuneration report this week in opposition to the pay of its new finance chief, Stephanie Bruce. But the resolution was passed with nearly 58% backing it in an advisory vote.
Ms Bruce moves from the accounting firm Pricewaterhouse Coopers, and is to receive an annual salary of £525,000, compared to the £450,000 her predecessor was paid. The details of the story are here.
Regulation
There’s food for thought for corporate governance in a story in the Financial Times this week headlined Bank of England warned criminal charge could destabilise Barclays, with the sub-heading Top regulator said criminal action over Qatar payments presented risk to bank’s safety. It is, unsurprisingly, one of the most read stories on the FT site. It begins: “The Bank of England warned prosecutors that a criminal charge against Barclays could present an existential threat to the lender, showing that regulators still worry about large banks being ‘too big to jail.’”
With comment from the Bank of England, the story looks at the relationship between the Serious Fraud Office (SFO) – which went ahead and charged Barclays in June 2017 - and the Bank of England. The SFO’s decision was a rare example of a major bank facing UK criminal charges, but these were rejected by the courts in October 2018. “This ‘too big to jail’ fear has long hampered enforcement action in the UK and US, setting off fierce public debate on both sides of the Atlantic” states the story, which notes that the SFO and Barclays declined to comment.
Gender diversity
The debate continues on how to raise female representation in influential private and public sector roles in Britain. Even when women are recognised for having done a good job in their chosen fields, translating that into being placed in a position of power and influence appears to be more elusive.
When it comes to regulation, we await to hear news of the appointment of a new team, starting with a new Chair for ARGA, the new audit regulator replacing the Financial Reporting Council (FRC). It is being closely observed in senior business circles to see if the post ends up going to a woman, with clear strong potential female candidates available for the job.
It will be interesting to see the outcome, as the FRC has now been publicly damned in the BEIS select committee report on The Future of Audit for “a degree of naivety in not acting on perceptions that it was captured by the Big Four, a suspicion fuelled by its self-perpetuating recruitment processes.”
One of the arguments repeatedly made by the FRC in the past about the preponderance of accountants among its senior ranks has been that they needed to understand audit to fulfil their role as regulators.
The Chairman and Deputy Chair of the FRC are appointed by the Secretary of State for Business. But its outgoing Chief Executive, Stephen Haddrill, who will step down later this year, did not come from an accountancy background. I interviewed him for the FT in 2013, which you can access on my old (and dated) website on this page.
The mix of skills at the top at ARGA will be one to watch for anyone with concerns about the future of audit regulation.
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