by Cydney Posner
One of the prevailing narratives of the recent Presidential election was that the same gestalt that drove the Brits to vote for Brexit also animated the pro-Trump forces and led to his presidential victory. Why then, when it comes to regulation of corporate conduct, do the two countries appear to be headed in such different directions? Or are they?
The U.K. Government’s new “Green Paper” on Corporate Governance Reform suggests, among other proposals, pay-ratio disclosure, giving employees more influence on company boards and making say-on-pay votes binding. In the introduction, Conservative Party P.M. Theresa May articulates the purpose of these new proposals, maintaining that the government she will “lead will be unequivocally and unashamedly pro-business….But for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. For many ordinary working people — who work hard and have paid into the system all their lives — it’s not always clear that business is playing by the same rules as they are. And when individual businesses lose the confidence of the public, faith in the business community as a whole diminishes — to the detriment of all. It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change. This Green Paper sets out a new approach to strengthen big business through better corporate governance.”
More specifically:
- With regard to executive pay, the Paper observes that “there is a widespread perception that executive pay has become increasingly disconnected from both the pay of ordinary working people and the underlying long-term performance of companies. Executive pay is an area of significant public concern, with surveys consistently showing it to be a key factor in public dissatisfaction with large businesses.” To address that concern, the Paper proposes the introduction of annual binding votes on all or some elements of executive pay (but also raises the need for development of structures for speedily and effectively agreeing to revised compensation when the original pay plan is rejected). Alternatives suggested include stronger consequences for failing an annual advisory vote, such as a subsequent binding vote; requiring pay policies to set an upper limit; and providing greater specificity on how companies should engage with shareholders on pay, including where there is significant opposition to compensation.
- To strengthen the powers of shareholders, one suggestion in the Paper is to establish a senior shareholder committee to scrutinize executive comp and other key corporate issues, such as long-term strategy and directors’ appointments.
- To enhance dialogue between comp committees and shareholders, the suggestions included requiring the comp committee to consult shareholders and the wider company workforce in advance of preparing its pay policy and requiring the members of comp committees to have served for at least 12 months on a comp committee before becoming chair.
- To enhance transparency, the Paper proposes publishing ratios comparing CEO pay to pay in the wider company workforce and enhancing disclosure of bonus targets (including requiring retrospective disclosure of all bonus targets).
- Long-term incentive plans were criticized as overly complex, not helpful in tracking long-term changes in the value of the company and potentially promoting short-term behavior. Suggested responses included using restricted stock awards instead of complex LTIPs and extending the vesting periods to five years.
The Paper also examined various approaches to strengthening the voices of stakeholders at the board level, particularly the voices of employees and customers. (Note that UK corporate law already provides that directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard for, among other things, the interests of employees, relationships with suppliers and customers and the impact of the company’s operations on the community and the environment.) Approaches suggested by the Paper include creating stakeholder advisory panels to consult with the board on matters such as compensation, designating existing non-executive directors to ensure that the voices of employees and other key interest groups are heard at the board level, appointing individual stakeholder representatives to company boards, and strengthening reporting requirements related to stakeholder engagement. The Paper also addresses improvements to corporate governance in large privately held businesses.
The new P.M. has generally discussed these proposed reforms before (see this PubCo post) and, it has been suggested (see this PubCo post), the proposals could be seen, at least in part, as a response to the fervor and resentment that spurred the Brexit vote. To the extent that these reforms are populist reactions to Brexit, the question is raised: how will this play out in the U.S.? On the one hand, much of the campaign rhetoric of the president-elect has been categorized as largely populist, with the candidate characterizing the high levels of CEO pay as a “joke” and a “disgrace” that is “often approved by company boards stacked with the CEO’s friends.” That populist rhetoric would suggest that, to address the disquiet surrounding increasing economic inequality, U.S. regulations designed to curb excessive CEO pay — such as the provisions governing executive pay and compensation disclosure in Dodd-Frank — would be retained or even amplified and that, as in the U.K., proposals to strengthen the powers of various stakeholders relative to boards might be on the agenda. On the other hand, it has been widely presumed, based on other repeated public statements by the candidate as well as proposed legislation, that the direction of the new administration would be deeply anti-regulatory, with the repeal of Dodd-Frank relatively high on the legislative agenda. As reported by the WSJ, scaling back or scrapping Dodd-Frank altogether was “one of the most consistent policy pronouncements” of the campaign, and Reuters has reported that the president-elect’s transition team has vowed to “‘dismantle’ the Dodd-Frank Act.” Moreover, the Financial CHOICE Act — which would repeal pay-ratio disclosure and scale back provisions such as say on pay and compensation clawbacks — has been described by the NYT as a bill that may “help shape the Republican agenda in the next term.” (See this PubCo post.) So while the new post-Brexit-vote U.K. government may be promoting pay-ratio disclosure, will the new “populist” Trump administration seek to abolish it? How will this paradox be resolved?
SideBar: As noted in this PubCo post, even if the Financial CHOICE Act is ultimately signed into law in substantially its current form, the question then becomes whether we will see more private ordering. Will governance activists begin to submit shareholder proposals for, e.g., pay-ratio and hedging disclosures? (But see this PubCo post discussing the possibility that the shareholder proposal process may be further restricted in the new administration.) Will some companies continue with provisions, such as annual say-on-pay votes, on their own initiatives?
