Keeping the UK at the top of the Corporate Governance table
Iain Wright, former Chair of the House of Commons Select Committee for Business, Energy and Industrial Strategy, writes:
This month marks the 25th anniversary of the publication of the Committee on the Financial Aspects of Corporate Governance, normally referred to as the Cadbury Code.
It’s fascinating to go back to the original report from 1992 and revisit the reasons why Cadbury was established in the first place. Its preface talks of the “harsh economic climate” which had exposed failings in corporate governance and financial reporting. Corporate governance scandals such as BCCI and Maxwell had raised concerns over the level and quality of accountability which, as Adrian Cadbury stated exactly 25 years to the week I’m writing this, that “the controversy over directors’ pay” had kept corporate governance in the public eye.
Much of the reasoning which set up Cadbury applies uncannily equally to today. The global financial crash has left a long tail of persistent austerity. Incomes and living standards are facing the biggest squeeze since the Industrial Revolution began. Productivity growth, the real driver of rising living standards, has spluttered and stalled for a decade.
However, for many of those at the top running companies, the financial crash passed by with little more than a shrug. Cadbury was established in the 1990s partly as a result of public disquiet over executive pay; since that time, chief executive remuneration has risen by over 160 per cent in real terms. This continues a longer-term trend: the ratio of median FTSE 100 chief executive pay to average UK wages has risen from about 11 in 1980 to 96 in 2014.
We on the Business, Energy and Industrial Select Committee in the last Parliament investigated the collapse of BHS and working conditions at Sports Direct which both shone a light on problems with the economy. The loss of BHS from the high street was accompanied by a truly breathtaking display of avarice from Philip Green, its owner, buying a third yacht for himself and his family whilst 12,000 people lost their jobs and tens of thousands of people faced severe cuts in their work pensions. Some Sports Direct staff were not even paid the minimum wage, and we were told of a case where a pregnant woman started labour in a toilet and too frightened to ask management for help for fear of losing her job.
The scandals of BHS and Sports Direct can be distilled into a failure of corporate governance, of a failure of effective checks and balances of the actions of key individuals and a complete abdication of responsibility of weak boards who should have been challenging and scrutinising much more.
Whilst BHS and Sports Direct are very much the extreme, and corporate leaders are quite rightly horrified at these individuals tainting the image of business, it has to be admitted that there has been a trend over the last few decades for less, not more or better, overview and scrutiny of executives. Factors such as holding onto shares for much less than before, the proliferation of foreign ownership of UK equities, a “balanced” portfolio of stockholdings and the decline in listed shares and a tendency for companies to go private has given rise to “ownerless corporations”, where no real check is being given to the activities of executives. This is one of the reasons given for the soaring nature of executive remuneration.
The business circumstances which led to Cadbury’s being established are similar, but the politicial circumstances are eerily so. As with 1992, 2017 has seen a general election with a Conservative Government returned, albeit with a precarious and much reduced Parliamentary majority, and a relatively recently-appointed Prime Minister losing authority and ultimately having to rely on the support of a Northern Ireland party. The governing party is split over the issue of Europe, which is having the effect of paralysing Parliamentary business, making it difficult, if not downright impossible, for Government to achieve anything in terms of legislative work.
There is huge similarity between Sir John Major and Theresa May. I suspect history will judge Sir John – who was a fundamentally decent man in difficult circumstances trying to steer a pro-business and social fairness and mobility agenda through his Government – in a more favourable light than he was portrayed at the time. Support from the Major Government for the Cadbury Report, in the light of everything else that was going on, helped steer corporate governance onto the right road for the next quarter of a century. Quite radical suggestions at the time – comply or explain, the splitting of the roles of chair and chief executive, a much stronger and expanded role for the audit committee – are now rightly seen as simply good tenets of effective corporate governance.
When Theresa May was campaigning to become leader of the Conservative Party and Prime Minister in the summer of 2016, she made a speech which stated that the economy was not working for most people. The speech mentioned the sacrifices that people had made, and how they felt out of control of their day-to-day lives whilst some companies were not effectively governed. A proper industrial strategy, combined with ensuring modern corporate governance met the needs of stakeholders as well as shareholders, including workers on boards, could have been the cornerstones of an effective May economic, social and industrial policy.
The speech was the best articulation of social democracy I had read in years. Her premiership genuinely seemed determined and poised to revise and reform capitalism to ensure that Britain despite the uncertainties arising from Brexit, remained at the forefront of good governance, we remained the best destination for investment and that people throughout our country benefited from better scrutiny of company decisions, a longer term decision horizon and improved competitiveness.
How far away we now are from that. In that speech in Birmingham, Mrs May stated “if we’re going to govern in the interests of the whole country, we cannot become defined exclusively by the process of our withdrawal from the EU”. I’m afraid her entire Government and her premiership is looking precisely like that. Her political authority has evaporated.
And yet, paradoxically, and counter intuitively, when her political weakness is on the floor and paralysing any chance of government action, Mrs May should be strong and bold. She should recapture the sentiments of her words in Birmingham and put them into action. She should make the reform of capitalism a large part of her premiership. She should make the evolution of corporate governance to accommodate the changes and challenges of the last quarter of a century a key policy plank, designed to ensure that British stays as the leader of governance throughout the world. After all, what has she got to lose, and the prize for Britain could be huge.