This morning the House of Commons Select Committee on Business, Energy and Industrial Strategy reported on its inquiry into corporate governance in the UK. Pointing to recent scandals and a ‘worrying lack of trust’ in business among the public, it makes several recommendations for action.
Firstly, it is fantastic that the Committee recommends annual pay ratio reporting on the gaps between a company’s CEO and its median UK employee, as well as between the CEO and the rest of the executive team. The Equality Trust’s evidence to the inquiry called for this top-to-median reporting and we are very pleased to see the promotion of transparency to help bear down on extreme pay inequality.
The sheer scale of the problem was highlighted in our recent Pay Tracker report, cited by the Committee, which found that two thirds of FTSE 100 CEOs are paid over 100 times the average salary in the UK. We also recommended that companies be encouraged to publish their top-to-bottom pay ratios to better reflect the full range of pay, and to publish a justification of this ratio and an account of changes to it over time.
The Committee might have gone further by calling for actual legislation to require pay ratio reporting, as we are doing with our pay ratios petition. Instead, it recommends that the Financial Reporting Council work with others on the detail and amend the Corporate Governance Code to require the ratios to be published. The Code works on a ‘comply or explain’ basis, whereas bringing forward legislation would signal that transparency about companies’ contributions to overall inequality is a Government priority.
Another extremely welcome recommendation by the Committee is its call for workers to be represented on the remuneration committees that decide executive pay, which it rightly says would ‘represent a powerful signal on company culture and commitment to fair pay.’ However, it stops short of endorsing mandatory workers on boards, common in some of the world’s most successful economies, and which The Equality Trust strongly advocates.
Other recommendations include clearer criteria for bonuses, which should be an incentive rather than a near-automatic reward; the phasing out of long-term incentive plans (LTIPs) which have become extremely complex, too often creating perverse incentives and leading to short-term decision making; and a new and stronger voluntary code of governance for private firms.
As the Government prepares its response to its corporate governance consultation, this report by MPs will help keep up the pressure on the Prime Minister and the Department for Business, Energy and Industrial Strategy to be bold in their plans to reform corporate governance for society’s benefit. You can help drive home the point, too, by signing our pay ratios petition. Promoting better governance means pushing companies to ask themselves who are the directors and who are the dishwashers, what do these groups get paid, and whose voices are being heard?
Lucy Shaddock, Public Affairs and Campaigns Manager