by Cydney Posner
She may be the new leader of the Conservative Party, but her party affiliation may not be entirely obvious from the speech delivered in July by UK Prime Minister Theresa May, launching her national campaign. In her vision of creating “an economy that works for everyone,” May herself characterized her approach as “something radical.” Her perspective reimagines some of the modern fundamentals of Conservatism: “This is a different kind of Conservatism, I know. It marks a break with the past. But it is in fact completely consistent with Conservative principles. Because we don’t just believe in markets, but in communities. We don’t just believe in individualism, but in society. We don’t hate the state, we value the role that only the state can play.” And this reconception would have a substantial impact on the corporate world as well.
In addition to issues such as Brexit, the criminal justice system and economic inequality, May advocated strenuously for corporate governance reforms. In May’s view, it “is not anti-business to suggest that big business needs to change. Better governance will help these companies to take better decisions, for their own long-term benefit and that of the economy overall.” Among the reforms to business that May is proposing are binding say-on-pay votes, pay-ratio disclosure, disclosure of bonus targets and better alignment between pay and long-term interests: “So as part of the changes I want to make to corporate governance, I want to make shareholder votes on corporate pay not just advisory but binding. I want to see more transparency, including the full disclosure of bonus targets and the publication of ‘pay multiple’ data: that is, the ratio between the CEO’s pay and the average company worker’s pay. And I want to simplify the way bonuses are paid so that the bosses’ incentives are better aligned with the long-term interests of the company and its shareholders.” According to May, her view was catalyzed by a recognition that the “FTSE, for example, is trading at about the same level as it was eighteen years ago and it is nearly ten per cent below its high peak. Yet in the same time period executive pay has more than trebled and there is an irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses.”
SideBar: As reported here, France has adopted binding say on pay, and this article indicates that say-on-pay votes are also binding in Switzerland and Sweden.
Moreover, in her comments in connection with recent merger activity in Britain, May’s view would substantially expand the nature of the constituencies — beyond simply shareholders – that have historically been taken into account in decision-making in the UK: “transient shareholders — who are mostly companies investing other people’s money — are not the only people with an interest when firms are sold or close. Workers have a stake, local communities have a stake, and often the whole country has a stake.” Moreover, in her view, the government “should be capable of stepping in to defend a sector” where a sale of a company could jeopardize an industry of strategic importance.
SideBar: As discussed in this article and this article, the UK has tended to follow the same approach as the U.S., focusing on the primacy of enhancing shareholder value; in contrast, in Europe, other stakeholder interests are often taken into account. However, as discussed in this PubCo post, there is a fierce debate ongoing in the U.S. regarding the extent to which, in making decisions, corporate boards are entitled to take into account other constituencies, such as employees and the larger community or must consider only the impact on stockholder value. For example, Professor Lynn Stout, author of The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (2012) has written that “boards exist not to protect shareholders per se, but to protect the enterprise-specific investments of all the members of the corporate ‘team,’ including shareholders, managers, rank and file employees, and possibly other groups, such as creditors.” Steven Pearlstein, a Washington Post columnist, has written that, “[i]n the recent history of management ideas, few have had a more profound — or pernicious — effect than the one that says corporations should be run in a manner that ‘maximizes shareholder value.’ Indeed, you could argue that much of what Americans perceive to be wrong with the economy these days — the slow growth and rising inequality; the recurring scandals; the wild swings from boom to bust; the inadequate investment in R&D, worker training and public goods — has its roots in this ideology.” However, “this supposed imperative… has no foundation in history or in law. Nor is there any empirical evidence that it makes the economy or the society better off.” On the other hand, Chief Justice Strine of the Delaware Supreme Court has indicated that the concept that corporate directors are entitled to take into consideration the interests of constituencies other than stockholders is naïve, tiresome and misguided. In his view, only where a company has taken the steps necessary to achieve the legal status of a “public benefit corporation” — a relatively new kind of for-profit corporation expressly intended to be managed for the benefit not only of stockholders, but also for employees, consumers, the community and public interests generally — is the board allowed to consider the interests of all stakeholders, not just shareholders, when making decisions about the company.
May’s broader view of corporate constituencies applies outside of the takeover context as well. May wants “to see changes in the way that big business is governed. 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. So if I’m Prime Minister, we’re going to change that system — and we’re going to have not just consumers represented on company boards, but employees as well.”
SideBar: Employee representation on boards is not uncommon in Europe. In Germany, employee representation on the supervisory board is typically legally mandated. See this article, which concludes that “prudent levels of employee representation on corporate boards can increase firm efficiency and market value.” In France, according to this article, “employee representation at board level becomes obligatory in larger shared-based companies (Société anonyme (SA) with 5,000 or more employees worldwide or 1,000 or more in France.” Apparently, you can take Britain out of the European Union, but you can’t Europe out of Britain, not if the new PM has her way.
Whether any of these concepts of corporate governance reform could take root in the U.S is an open question. But keep in mind that, to the extent that any of these reforms has so far been adopted in the U.S., the House Republicans are proposing to eliminate or substantially modify it in the Financial CHOICE Act. (See this PubCo post.)