14th February 2017
CWU Response to BEIS Corporate Governance Reform Green Paper
Introduction
1. The Communication Workers Union (CWU) is the largest union in the communications sector in the UK, representing approximately 192,000 members in the postal, telecoms, financial services and related industries.
2. The CWU believes that the UK’s corporate governance framework requires radical change to help secure a fair deal for working people. An economic system that benefits a privileged few, whilst consigning millions of workers and their families to live in poverty, is both unacceptable and unsustainable.[1]
3. We welcome the government’s decision to publish a Green Paper on corporate governance reform. However, we believe the Paper’s proposals are far from ambitious enough to genuinely bring about public faith in big business or to achieve the Prime Minister’s vision of a fairer Britain and an economy that works for everyone.
4. If the government is serious about these goals, it must be bolder in reforming corporate governance, but it must also recognise the value and importance of trade unions. This should begin with a repeal of the Trade Union Act and the introduction of a set of positive rights to advance collective bargaining and promote the role of trade unions in redressing the imbalances in how businesses are run.
Executive Pay
Q1. Do shareholders need stronger powers to improve their ability to hold companies to account on executive pay and performance? If so, which of the options mentioned in the Green Paper would you support? Are there other options that should be considered?
5. As the Green Paper notes, executive pay has become increasingly disconnected from the pay of ordinary working people. The ratio of average FTSE 100 CEO pay to the average pay of full-time employees stood at 128:1 in 2015, up from 47:1 in 1998. This is an area of significant public concern, and a key factor in public dissatisfaction with large businesses.
6. We do not believe this issue can be resolved simply by giving shareholders stronger powers to hold companies to account. Institutional shareholders in particular, who own the majority of public equity in the UK, have no real interest in promoting a fair pay ratio between executives and employees.
7. We do not see that increasing the frequency of the binding vote on pay policy from three years currently to one year will have any significant effect on shareholder support for executive pay awards, and it is unlikely to curb levels of executive pay. If anything, it could exacerbate the problem of short-termism in UK corporate governance, by incentivising executives to deliver immediate returns on investment in order to bolster shareholder support for their remuneration package ahead of the annual vote.
8. It is disappointing and a major omission in our view that there is no proposal for promoting employee shareholders, which would bring long term benefits for businesses as well as for employees. Employee owned businesses have been found to be more productive, more innovative and more resilient to economic turbulence.[2] We believe the government should introduce measures to promote employee ownership of businesses and to ensure that those who are shareholders are longer term stakeholders in businesses. This should help to tackle the problems of excessive executive pay and address short-termism and speculative high-risk behaviour in corporate decision making.
Q3. Do steps need to be taken to improve the effectiveness of remuneration committees, and their advisers, in particular to encourage them to engage more effectively with shareholders and employee views before developing pay policies? Do you support any of the options set out in the Green paper? Are there any other options you want to suggest?
9. The CWU agrees that a renewed effort is needed to improve the ratio between executives and their staff. Of those options suggested by the Green Paper, we agree that there is a case for stronger remuneration committees, pay disclosure and long-term pay incentives. However, we are concerned that too much emphasis is placed solely on shareholder rights at the expense of stakeholders generally. In particular, we believe that staff must be given a credible voice in remuneration and corporate management more generally through active engagement between trade unions and management.
Q4. Should a new pay ratio reporting requirement be introduced? If so, what form of reporting would be most useful? How can misleading interpretations and inappropriate comparisons be avoided? Would other measures be more effective?
10. The CWU believes that steps must be taken to improve communication between management and staff in regard to pay policies. With this in mind, we agree with the suggestion that pay ratios be reported. Ratios between CEO/senior executives and the lowest, mean and median paid staff should be included to give a holistic picture of pay disparities.
Q5. Should the existing, qualified requirements to disclose the performance targets that trigger annual bonus payments be strengthened? How could this be done without compromising commercial confidentiality? Do you support any of the options outlined in the Green Paper?
11. We agree with the Green Paper’s suggestion that the requirements should include a full disclosure of bonus targets. This would enhance transparency as to corporate goals and aspirations and ensure that excessive salaries are not diverted into bonuses to circumvent pay ratio reporting.
Q6. How could long-term incentive plans be better aligned with the long-term interests of quoted companies and shareholders? Should holding periods be increased from a minimum of three to a minimum of five years for share options awarded to executives?
12. Short-termism is one of the greatest challenges facing the British economy; it is vital that alternative approaches are investigated. The CWU agrees with the Green Paper’s suggestion that share options provided in executive remuneration packages are too short and can incentivise irresponsible behaviour. We would therefore support further investigation into ‘restricted share’ awards and the implementation of extending holding periods for share options.
Strengthening the employee, customer and wider stakeholder voice
Q7. How can the way in which the interests of employees, customers and wider stakeholders are taken into account at board level in large UK companies be strengthened? Are there any existing examples of good practice that you would like to draw to our attention?
Q8. Which type of company do you think should be the focus for any steps to strengthen the stakeholder voice? Should there be an employee number or other size threshold?
Q9. How should reform be taken forward? Should a legislative, code-based or voluntary approach be used to drive change?
13. The Green Paper poses the questions above alongside four options to strengthen the voice of “employees, customers and other interested parties at boardroom level.” These are as follows:
I. Stakeholder advisory panels
II. Designate non-executive directors to ensure that the voice of key interested groups, especially that of employees, is being heard at board level
III. Appoint individual stakeholder representatives to company boards
IV. Strengthening reporting requirements related to stakeholder engagement
14. We are concerned that none of these options is adequate to strengthen employee voice and representation at board level. Worse still, we believe the measures as outlined would have the opposite effect by undermining the role of trade unions, weakening employee representation and further disenfranchising ordinary working people.
15. It is symptomatic of the government’s anti-union agenda that trade unions, which represent the interests of around 6.5 million union members in this country, are completely absent from the Green Paper proposals. The introduction of Employment Tribunal fees, the Trade Union Assured Register of Members, and the Trade Union Act, represent a sustained attack on the voice of working people.
16. There can be no doubt that the watering down of trade union and employment rights has contributed to the increasingly casualised and precarious nature of the labour market today, and the rapid growth of in-work poverty. If we are to genuinely strengthen employee voice, the government must acknowledge that trade unions have a leading role to play, and they must be given the freedom to be more effective in improving the lives of working people. This must start with a repeal of the Trade Union Act and the introduction of a set of positive rights to advance collective bargaining, so that the interests of workers are properly represented right across the economy and in all sections of the labour market. And the government must ensure that proposals being brought forward in relation to corporate governance now do not undermine the role of trade unions in representing working people.
17. In relation to Options i and ii, we are concerned that any “advisory panel” or designated non-executive director to represent the interests of employees would be toothless in stopping corporate excesses. We are also particularly concerned that both of these options would be used by employers as an excuse to bypass trade unions and undermine their role.
18. Option iii is to appoint individual stakeholder representatives to company boards, but the government is clear this would not be mandatory. This represents a clear reversal of Theresa’s May’s leadership campaign pledge to install workers on company boards and shows that despite its rhetoric, the government has no real intention of strengthening the voice of working people.
19. The proposal to appoint individual stakeholders to company boards has a number of weaknesses as it stands. First, it states that any individual appointed to a company board would be subject to the same set of duties as other company directors. We do not agree this should be the case, and we consider that in drawing up the duties of workers’ representatives it is vital that they are shielded from the legal ramifications of contentious decisions, particularly in regard to a director’s statutory duty to “promote the success of the company for the benefit of its members [i.e. shareholders] as a whole”. We believe that worker directors should be exempt from this particular duty, as it would compel them to put immediate profit before the long term interest of the workforce they would be elected to represent.
20. Secondly, the green paper provides no information on how workers’ representatives would be selected. Again, we would state that if the government is to take forward this proposal it must ensure it is not used as a means to sideline trade unions and we therefore believe it is essential for workers’ representatives to be nominated by the recognised union for the relevant employer.
Corporate governance in large, privately-held businesses
Q10. What is your view of the case for strengthening the corporate governance framework for the UK’s largest, privately-held businesses? What do you see as the benefits for doing so? What are the risks to be considered?
Q11. If you think that the corporate governance framework should be strengthened for the largest privately-held businesses, which businesses should be in scope?
Q12. If you think that strengthening is needed how should this be achieved? Should legislation be used or would a voluntary approach be preferable? How could compliance be monitored?
21. The Green Paper recognises that good governance is not a simple question of corporate profitability and is about more than the relationship between the owners and the management of a business. The acknowledgement that corporate failure has negative repercussions for staff and customers alike is to be welcomed. However, we do not believe either of the options presented are suitable in overcoming this challenge.
22. Option i proposes that enhanced standards of corporate governance be applied more widely. In particular it suggests that a “separate governance code” could be developed by “the FRC (Financial Reporting Council) or a business organisation such as the Institute of Directors” with the adoption of the code on an “entirely voluntary” basis. In this instance, neither the means of drawing up or implementing the code is agreeable because it will not reflect the views of workers, and it will be ignored and ineffective if not made a requirement.
23. Meanwhile, option ii proposes that public companies be required to meet “stronger corporate governance and reporting standards than privately-held businesses.”Placing an emphasis on business ownership/structure, rather than size and employee numbers would result in the practices of many privately-held businesses going unscrutinised. JCB, for example, employs upwards of 11,000 people but is privately-owned. Under option ii, its corporate governance structure would remain unreconstructed with no avenues for staff or other stakeholders to exert influence.
24. As discussed in detail above, the conditionality of both options renders them unsuitable in tackling the problem of inadequate corporate governance structures. The benefits of doing so are manifest: to reduce inequality, to enhance productivity by empowering workers and to create a more sustainable corporate culture for the long-term.
For further information on the view of the CWU contact:
Dave Ward
General Secretary
Communication Workers Union
150 The Broadway
London
SW19 1RX
Email:
Telephone: (+44) 0208 971 7251
14th February 2017
1
[1] There are a total of 7.4 million people, including 2.6 million children, living in poverty despite being in a working family, according to ‘Monitoring poverty and social exclusion 2016’, Joseph Rowntree Foundation
[2] Guide to structuring employee ownership, employee ownership association and Postlethwaite employee ownership lawyers, accessed on 7th Feb 2017 at: http://employeeownership.co.uk/wp-content/uploads/EO-guide-to-structuring-employee-ownership1.pdf