Sclerotic and creeping regulation is slowly choking economic growth

Britain risks sleepwalking into a regulatory environment ill-suited to a fast-changing world

‘The weird anomalies on pay are only a small part of a much bigger problem’

Brave is the person who argues for really well-paid people to be paid even more; braver still to do it in the middle of a cost of living crisis. So, kudos to Julia Hoggett, the chief executive of the London Stock Exchange (LSE), who says British companies are finding it difficult to attract and retain executives because they offer smaller pay packages than rivals in the United States.

Perhaps that should be “brave” in the Yes Minister sense of the word; Hoggett’s argument faces an uphill battle. With startling inevitability, the comments, made in an article on the LSE’S website, have been criticised as “a bit deluded” by the High Pay Centre. The head of the Trades Union Congress said the pay of UK chief executives should go down, not up.

But is Hoggett right? The average pay for a FTSE 100 chief executive last year was £3.4m. That is – to state the bleedin’ obvious – a lot of money. But it’s much less than $18.3m (£14.6m), which is what the average boss of a S&P 500 company received in 2021. Recruitment consultants – or “headhunters” in the vernacular – say the basic rule of thumb is that American executives are paid between three and eight times what a similar job in Britain would command.

It’s a slight apples-and-pears situation: US companies tend to be larger, more complex and therefore harder to manage. But, broadly speaking, you would imagine that if an executive can run, for example, a 1,000-store retailer then they can probably run a 2,000-store or 3,000-store retailer. The head of Tesco (or BP or Barclays), would therefore be a perfectly credible candidate to run Wal-mart (or Exxon or Citigroup).

Yes, we’re comparing executives who earn Lotto jackpots each year with those pay whose packets measure up against Euromillions wins and, frankly, that’s a pretty icky discussion. But British businesses are – or should be – operating in a competitive global market; the top-line numbers suggest they may have one hand tied behind their back.

Tales from the corporate front line reveal that distortions and intended consequences abound. Indeed, pay may only be the tip of the iceberg and an early warning sign that Britain’s corporate governance environment is sliding into sclerosis, hinting at underlying pathologies with broader implications for the economy.

One headhunter says he knows of a UK digital business where the head of the US arm, which is responsible for a third of the company’s revenues, is paid eight times what his boss, the group chief executive, gets.

Another says he knows of a British company that bought a smaller US rival. Eventually the board promoted the head of the American business to run the whole shebang. The step up to the bigger job came with an 83pc pay cut.

Intense scrutiny can perversely lead to companies overpaying, too. Mark Freebairn, a partner at Odgers Berndtson, says companies looking to hire untested, external candidates to senior positions often have to pay over the odds because they won’t be able to get future pay rises past shareholders, meaning that, once the hire has proved themselves, they’ll get poached.

“It’s insane,” says Freebairn. “If that was your own money you categorically wouldn’t do it like that.”

Why is it happening? Britain has long operated under a principlesbased approach (rather than a rulesbased approach) to regulation. This has mostly served the country well. Writing out long lists of very specific rules is time consuming, inflexible and carries a risk of unintended consequences. The more dynamic the industry, the greater the risk.

However, a key component of a principles-based approach to regulation is the concept of comply-orexplain. A company can deviate from the corporate governance code, for example, if it has a good reason for doing so and articulates it to shareholders.

The trouble is that lots of companies say such explanations are falling on deaf ears. The corporate governance teams at fund management firms and proxy voting firms are small and shrinking. They are often covering too many companies and are therefore adopting a tick-box approach to oversight. “Comply-or-explain” has simply become “comply”.

That sounds fine and up to a point it is. But there’s a risk the UK’S principlesbased approach to regulation is slowly and accidentally morphing into a de facto rules-based approach.

The danger is that we end up with neither the certainty that can be provided by a detailed set of well thought-through rules nor the flexibility to interpret principles. Rather you get the worst of both worlds: vague principles that are effectively carved in stone. And this, inevitability, leads to a whole heap of unhelpful unintended consequences. The weird anomalies on pay are only a small part of a much bigger problem.

Part of the issue is that the principlebased approach works under the assumption most companies and executives are keen to do the right thing and not trying to pull a fast one. If the prevailing anti-business sentiment means this is now politically unworkable, we better figure out what to do about it.

In reality, most regulatory regimes are a mix of approaches. But there is nevertheless an issue if the authorities believe they are presiding over a more broad-brush approach but are actually sleepwalking into one that is becoming increasingly prescriptive and didactic.

For one thing, it means they won’t be alert to managing the inherent trade-offs; for another, a regulatory environment that is neither fish nor fowl may be ill-suited to the country’s economic needs.

A principles-based approach should be the best way to cope with overseeing the fast pace of technological change brought on by, for example, the huge advances in artificial intelligence and quantum computing.

The best bet for reviving the British economy from its long torpor is to be quick out of the blocks in several such nascent sectors. Unfortunately, as things stand, there’s a very real risk we’ve accidentally tied our shoelaces together.