Shareholders should be given more powers to have the final say on executive pay, where it has disconnected from exceptional performance according to the CBI. In its response to the government’s consultation on corporate governance the CBI has said that there never been more important time to build public trust in business.
Its recommendations include:
Executive Pay: A binding vote regime should be triggered if a company either loses the shareholder advisory vote on remuneration outcomes or has faced a significant vote against this resolution in two consecutive years;
Pay ratios: Must focus on the trends within a company’s UK workforce - showing how the variance between executive pay and average worker pay is changing over time;
Stakeholder voices: Companies should be able to take a tailored approach but required to report how they are engaging with and taking action on behalf of their stakeholders;
Private companies: Businesses of sufficient scale – over 1000 employees - should be subject to high standards of corporate governance. Government should measure its approach against several key tests – proportionality; avoiding duplication and creating a tailored approach.
“Good corporate governance is an essential ingredient for trust between business and society,” said Paul Drechsler CBE, CBI President. “But we know from recent events that many people feel business plays by a different set of rules. So whether it’s on executive pay or listening to key stakeholders, we know we need to do more.
“At the CBI, we’ve been listening to our members and two points are raised time and time again about the government’s proposals. Firstly, businesses get it. They want to make progress now and take action on reward, reputation and the value of business in society. And secondly, many are already scrutinising how well they measure up.
“It’s not just about the rules we play by, it’s about leadership,” he added. “We as business leaders know that it’s about our behaviours and the actions we take. Now is the time for us to stand up and show great leadership in these changing - and challenging - times.”
Meanwhile, in it’s response to the green paper, the CIPD says a major re-think of corporate governance is needed. Chief on its list of priorities is to improve CEO pay transparency and ensure boards recognise their broader responsibility towards the workforce when decisions on executive pay and business investment are made.
This message was made jointly by the CIPD and the High Pay Centre. The groups point out that if FTSE 100 CEO pay continues to increase at the same rate for the next 20 years as it has for the last two decades, the average ratio between CEO and average pay would increase from about 129:1 to more than 400:1.
The joint response, which marks the start of a formal partnership between the CIPD and High Pay Centre to advocate fairer and more ethical approaches to pay and reward, recommends that:
•All publicly listed companies should be required to publish the ratio between the pay of their CEO and median pay in their organisation.
•All publicly listed companies should be required to have at least one employee representative on their remuneration committee.
•All publicly listed companies should be required to establish a standalone human capital development sub-committee, chaired by the HR director, with the same standing as all board sub-committees.
•The Government should set voluntary human capital (workforce) reporting standards to encourage all publicly listed organisations to provide better information on how they invest in, lead and manage their workforce for the long-term.
“This green paper provides an opportunity to think differently about how UK plc can lead the way in post Brexit Britain,” notes CIPD chief executive Peter Cheese. “Current levels of executive pay undermine both trust and sustainability. Fiddling around the edges of the current system won’t provide the solutions we need for an innovative, productive and leading economy. We are encouraged by and supportive of the recent announcement by the FRC of the need for a wider review of corporate governance codes to better reflect modern business realities.
“Let’s create a new system, where decisions about executive pay are taken within a different context, one which places the firm’s human capital development – or workforce – at the heart of Board decision making,” he concludes.