Theresa May has just become prime minister but only after warning big business that things cannot continue as they are. The economy needs change, she says, and top of her agenda is a transformation in corporate governance.
In an article in The Times on the very day that May became PM by default, the new party leader reveals her disquiet about large companies. So much so, in fact, she wants employees and consumers on company boards, shareholder votes on executive pay and government action on making incentives more aligned to the “long-term interests” of their companies. She also wants more disclosure of pay multiples and bonuses.
The article gives a clear impression that May is deeply unhappy with large corporates, that they are less accountable than they should be and their non-executives are falling short.
In short, May believes there’s something rotten in the state of corporate Britain and she’s ready to confront it: just as she was prepared, as home secretary, to confront the police on their behaviour and management; and just as she was ready to tell Tory party members they were now in the “nasty party” when she served as party chairman.
And May sets high aims for her party and for her own time in charge. She intends to make sure the economy “truly works for everyone”; one of the four foundations for achieving that aim is to “get tough on irresponsible behaviour in big business”.
Politically, this is an interesting move. For many, the failure of the Remain campaign to win the EU referendum is a reflection of the electorate’s distrust of big business and its interest in maintaining the status quo with the European Union. Damn the EU and you damn big business. In one sense May, a Remain campaigner, could be read as saying she’s heard the message, she agrees and is willing to act.
Many in business won’t see this as good news. Some have already indicated that there are more important things to consider, such as certainty over the economy’s final destination after it’s been through the Brexit negotiations mill.
That’s true but executive pay levels have become warped and, in an age of “sustainable” business models, how long can companies resist formally recognising their responsibilities to groups broader than just shareholders? BHS’s ignominious collapse leaving pension scheme members out of pocket is still fresh in voters’ minds.
That said, it doesn’t take much to realise that we need some flesh on the bones of May’s proposals. She might propose employees and consumers for company boards, but what will their precise role be, what powers will they have? Will they sit on a single unitary board or will British companies be catapulted into a dual-board system like those popular on the continent? Which mechanism will government use to ensure that long-term company interests match executive incentive plans? How will it be policed? What will the sanctions be, if there are any at all? What could enforcement look like? Will new measures be voluntary or mandatory?
We’re still a long way from any of this policy taking shape and May’s policy statement forms only a sketchy impression of what may be coming. But there’s another issue to consider. As interesting as May’s proposals are, there remains a potential contradiction.
The proposal for employees and consumers to join company boards appears to imply a shift in boardroom accountability. On the continent, where boards that include employees have functioned quite happily for some time (though it must be said, the continent has its own share of corporate scandals), the remit of boards is to work for “stakeholders”. But May doesn’t suggest that. Her article doesn’t make it explicit, but appears to hold with the view that boards work for shareholders and “defend” their interests.
The problem for employees and consumers sitting on boards is deciding whether they agree. An employee concerned with pay, training, work conditions, recruitment, pensions, job security, the long-term sustainability of business models and their company’s impact on local communities may have interests far removed from an institutional shareholder browsing stock prices on a screen in the City.
That’s why to even suggest that employees and consumers join company boards is to open a debate about whether boards should formally work for shareholders or for a wider group of stakeholders. It is counter-intuitive to ask an employee to sit on a board and then say they serve in the interests of shareholders only.
If Theresa May begins the process of implementing her governance proposals these issues will need to be confronted. May will need to decide where she stands and to whom boards should be accountable, even if the issue is not at the top of the business wish list.
May’s article indicates unease with the country’s economic policy and a willingness to tackle the problem head-on because it has failed many people. We wait now to see whether she is willing to confront corporate governance and what the details of her reforms will be. Of course, the irony is that if her changes go ahead, governance in the UK could be on the threshold of becoming very much more European, just as we are parting company with the EU.
C’est la vie.