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U.K. Plans to Extend Top-Pay Rules to Closely Held Companies

  • Non-executive directors could represent workers on boards
  • Companies to publish pay ratios between executives, workers

The U.K. government proposed changes to the the way executive pay is set and company boards are structured in measures that would extend to closely held companies, as Prime Minister Theresa May seeks to crack down on corporate excess.

Workers would have to be represented on company boards, for example by a non-executive director assigned to them, and executive pay would face annual binding shareholder votes under the plans outlined on Tuesday by Business Secretary Greg Clark. Businesses would also be compelled to publish the compensation ratio between executives and average workers. The plans are subject to a public consultation that ends Feb. 17.

“It is right to ask business to play its part in building an economy that works for everyone,” Clark told lawmakers in Parliament. “This government is unequivocally and unashamedly pro-business but we hold business to a high standard in doing so.”

The proposals follow through on a key plank of May’s bid for the Conservative Party leadership in July, when she said the government needed to “get tough on irresponsible behavior in big business.” She built on that at the Tory conference on October, listing a set of examples of corporate misbehavior, before saying “I’m putting you on warning.” On Tuesday, her office said the government plans to extend the corporate-governance rules to the largest closely held firms.

‘Irresponsible Minority’

“We will explore ways to improve and extend good governance across big business so that everybody plays by the same rules and we create an economy that works for everyone, not just the privileged few,” May said in a statement. The country has “seen an irresponsible minority of privately held companies acting carelessly –- leaving employees, customers and pension fund beneficiaries to suffer when things go wrong.”

The government plans to create a “bespoke code of practice for the largest private companies,” with which firms would have to “comply or explain” in their annual accounts, according to May’s office. Such companies would also have to heed reporting requirements on workforce diversity, greenhouse-gas emissions and social and community issues, it said.

“Businesses agree that legitimate concerns exist and are determined that the unacceptable behavior of the few should not tarnish the effectiveness of the many,” said Josh Hardie, deputy director-general of the Confederation of British Industry. “It is right that approaches to governance continue to evolve.”

Business Concerns

British Chambers of Commerce Director General Adam Marshall said there is “concern that heavy-handed regulation could reduce investment or create significant costs for firms.”

“Reforms need to be proportionate, and businesses will want reassurances from government that any changes resulting from these proposals will not create additional, costly regulatory burdens for medium-sized and smaller companies,” Marshall said.

The consultation document has three sections: one dealing with strengthening shareholder influence on executive pay and the publication of pay ratios; a second focusing on the interests of employees and customers and the structure of boards; and a third looking to extend areas of corporate governance from listed companies to private ones.

Clark said workers could be represented on company boards by a non-executive director who wasn’t an employee, a retreat from May’s earlier suggestion that a worker would be appointed. While that option “is available to companies,” Clark said, “we’re not going to make it happen.”

Employee Voice

“What we do want to do is to strengthen, to have a stronger voice to workers on boards,” he said. “We want to have the employee voice much more prominent in boardrooms.”

The business secretary said he isn’t seeking to mandate a particular ratio between the pay of executives and that of an average worker, but rather to make the process transparent by requiring companies to publish the data. The ratio has tripled since the late 1990s to a multiple of about 150, according to the High Pay Centre, which analyzes corporate remuneration. 

Executive pay “has substantially outpaced the performance of the underlying shares,” Clark told BBC Radio 4. “You should have transparency about what is going on,” he said, adding: “I want them to be paid in line with performance.”

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