Corporate Governance Reform: A Proposal for Curbing Executive Pay

 

The Centre for Governance, Leadership and Global Responsibility submitted a proposal to the Government on 17th February 2017, titled ‘Proposal for UK Corporate Governance Reform: A Broader Perspective and a New Approach’. This was in response to the Government’s open consultation on proposed reforms in executive pay, stakeholder interests and governance for large private companies.

The Centre’s proposal aims at addressing the same concerns specified in the government’s Green Paper regarding how to curb excessive executive pay, linking executive pay to corporate performance and encouraging stakeholder engagement in corporate governance. However, it approaches those concerns with a broader perspective considering how corporate income will be distributed not just for executive managers but also for shareholders and employees and for the company as a whole in a long-term basis. The current options listed in the Green Paper as well as previous corporate governance reforms all tend to intervene narrowly in corporate internal affairs with detailed processes and complicated procedures but avoid addressing issues of substance. The Centre’s proposal takes a different approach: directly addressing the substance with simplified processes and procedures and leaving more space for companies to make their own decisions.

The Centre’s proposal suggests that the regulation should provide a general guideline for those large companies in the UK with limited liability status and do not need to interfere too much with internal company processes. A guideline of three general policies is needed. First, a general income distribution policy should be agreed upon by the three parties (shareholders, directors/managers, and ordinary workers) after being consulted with other stakeholders. The company should make decisions on how annual profits will be proportionately distributed among shareholder dividends, employee rewards, and future business development. Second, a pay-performance link policy should be highlighted: ‘no income, no distribution’. Third, a fair pay reward policy should be laid out to make bonuses and incentive plans available to both executives and ordinary workers based on their contributions.

Prof David Welbourn, a Visiting Professor of the Centre, commented that the proposal ‘demonstrates a significant breadth of thinking and drawing from other fields which should have the desired effect if the reviewers of the proposal are sufficiently open to recognise this’.

Post written by William Sun (Deputy Director, Centre for Governance, Leadership and Global Responsibility)

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