UK again leading the way on CG?

Many observers attributed June 23rd's Brexit vote to leave the European Union to voters' dissatisfaction with worsening inequalities and asymmetries in wealth and power in the UK, and more fundamentally, as the electorate's response to economic and societal insecurity and instability.

Just two days before she officially became UK Prime Minister July 13 due to the fallout from the Brexit vote, Conservative Party leader Theresa May seemed to find common cause with former US presidential candidate Bernie Sanders when she spoke of her vision for corporate Britain.  May’s speech also echoed corporate responsibility themes pushed by the former Labour leader Ed Miliband during the 2015 election campaign.  May spoke of a country that "works not for a privileged few but for every one of us."  However, she stressed that “it is not anti-business to suggest that big business needs to change.”

Then last week, Members of Parliament released a report on the scandalous collapse of British retailer BHS.  Asked what May would do to curb corporate greed, her spokeswoman said: “The prime minister has already set out that we need to tackle corporate irresponsibility, reform capitalism so that it works for everyone not just the privileged few.  That means in the long run doing more to prevent irresponsible and reckless behaviour and look carefully at the policies linked to that and work at the best way forward.”

Among the notable initiatives PM May sketched out are:

• Making annual shareholder votes on executive pay legally binding;
• Allowing employee and consumer representatives to sit on corporate boards;
• Escalating antitrust enforcement of M&A activity; and
• Cracking down on individual and corporate tax avoidance and evasion.

"There is an unhealthy and growing gap between what these companies pay their workers and what they pay their bosses," May claimed.  Britain led the way in requiring shareholder votes on executive compensation, in 2002 becoming the first country to adopt mandatory nonbinding shareholder votes on executive compensation (say on pay), through the Directors’ Remuneration Report (DRR) regulations.  Say on pay legislation subsequently spread to Australia, Belgium, the Netherlands, and Sweden, among others.  It was only in 2011 that advisory say on pay for top executives’ compensation was made universal for public companies in the U.S. by virtue of the Dodd-Frank Act.  Along with pressing for binding say on pay votes, PM May also called for Britain to adopt the U.S. regulatory requirement that companies publish the ratio of pay between their chief executives and their employees median pay.

Although her comments were taken to refer to adding employee and perhaps consumer representatives to corporate boards, May alluded to board diversity in a broader sense, saying: “The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders.  In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough.”

"Better governance will help these companies to take better decisions, for their own long-term benefit and that of the economy overall," May said.  This contention, pertaining to her government's specific proposals, will be vigorously debated for some time.  But the new Prime Minister appears intent on pushing the CG envelope for UK companies, which if past is prelude could foreshadow changes in other markets.

Robert Stead