Shareholders’ yellow’ card’ on pay for CEOs
THERE has never been a more important time to make a big difference through government, business and society working together. Great partnerships are underpinned by trust, understanding and mutual respect.
Good corporate governance is an essential ingredient for trust between business and society. But we know from recent events that many people feel business plays by a different set of rules. So whether it’s on executive pay or listening to key stakeholders, we know we need to do more.
Earlier this month, I participated in a roundtable discussion in Cardiff on the UK Government’s corporate governance green paper. The reforms, according to the Prime Minister, “set out a new approach to strengthen big business through better corporate governance”.
At the CBI, we’ve been listening to our members – and two points are raised time and time again about the Government’s proposals.
Firstly, companies get it. They want to make progress now and take action on reward, reputation and the value of business in society.
Secondly, many are already scrutinising how well they measure up.
Executive pay has become a lightning rod for public discontent. The CBI is absolutely clear that the unacceptable behaviour of the few does not reflect the high standards and responsible behaviour of the vast majority of companies.
Our proposals seek to address some of the issues that have undermined the reputation of business. Where CEO pay has become disconnected from performance, shareholders should have the power to show the company a “yellow card”.
This would mean firms that lose their advisory vote on pay, or receive 25% or more votes against the directors’ remuneration report for two consecutive years, should face a binding vote on policy at their next AGM.
Transparency and proportionate pay are important considerations. There has been much debate about pay ratios and the potential for them to be misleading; for example, where comparisons have been made between investment banking and retail.
But transparency and openness help build trust. That’s why the CBI is recommending that any pay ratio publication should focus on the trends within a company’s UK workforce, showing how the variance between executive pay and average worker pay is changing over time. This way, pay ratios may provide meaningful transparency and value to this debate.
We all know that the most successful companies are great at listening to and learning from their customers, employees, suppliers and communities.
They have the best relationships and this gives them a competitive advantage.
Companies are trying to improve by considering different options. Some are exploring the creation of board subcommittees, while others are looking at how to involve stakeholders in their annual corporate governance activities.
A desire for high standards and competition are driving the right behaviour.
Mandating a single option would stifle this, and not solve the problem. Instead, companies should still be required to explain how they’ve listened – and acted upon – the views of their employees and other stakeholders.
Many of the world’s greatest challenges have been and will continue to be solved by businesses. Provided we have earned the trust of society in order to do so.
It’s not just about the rules we play by, it’s about leadership. We as business leaders know that it’s about our behaviours and the actions we take.
Now is the time and a great opportunity for us to stand up and show great leadership in these changing – and challenging – times.
Ian Price is CBI Wales director