More accountability expected with Theresa May's corporate governance reforms

Written by Reza Eftekhari, UK market director, Morrow Sodali

INCOMING prime minster Teresa May’s announcement to reform corporate governance procedures would be a positive step if they lead to more accountability and better transparency. While companies currently only conduct binding votes on their overall remuneration policies every three years, the proposed measures include the introduction of annual binding votes on both the pay policy and packages of company directors.

Since the financial crisis of 2008, investors have been under increasing pressure from the public, their clients and the government to keep management of underperforming companies accountable for their failures. This year, we have seen shareholder opposition on executive pay of FTSE 100 companies even higher than the so called “shareholder spring” in 2012. With such shareholder activism on the rise, any justified reforms to improve governance practices of public companies in the UK would be a welcome change.

Furthermore, from a survey conducted by Morrow Sodali on a panel of investors representing the management of $23trn worth of assets (50% UK, 35% US, 15% Europe), it is worth highlighting that promoting engagement with investors is seen as necessary to reflect on changes following specific thresholds of ‘against’ votes. A significant proportion of those investors surveyed (28%) said that companies should consider amending their compensation plan when they receive above 15% of votes against their Say on Pay policy.

Following the result of the recent EU Referendum, familiar questions have crept up again.  The outcome has brought widespread attention back to the issue of inequality in Britain, as well as questions over the nature of the relationship of big businesses and their employees. It should not come as a surprise to see more on issues surrounding executive remuneration in the coming weeks and months.

While FTSE 100 companies are rarely out of the spotlight, a key ongoing issue for FTSE 350 companies will be justifying the link between executive pay and performance. Shareholders are demanding more transparency and a better rationale for executive pay alignment. As part of this, pay policy must be aligned with sustainable performance to protect the long term interest of shareholders. For this to be effective, there is a need for better dialogue and more constructive engagement between companies and their investors.

The proposed changes announced by the former home secretary make sense and could be a positive move, creating better dialogue between executives and investors; and the power of investors to have a say would almost certainly increase.

However, these moves alone may not be enough to narrow the pay gap between executives and their employees. For the pay gap that exists to be diminished even further, there would need to be real cultural and structural changes required within companies. At a board level, this would include engaging with investors proactively and adopting more responsible policies in terms of linking pay packages to performance. The balance must be right – still appealing to the most talented prospects, but having a more responsible structure in place where policies are also socially acceptable.