29 August 2017

By Sarah Glenister, National Development Officer, IER

Launching a consultation into Corporate Governance at the end of 2016, the government announced that workers needed a stronger voice to ensure businesses operated with regard to the interests of their workforce, and to tackle excessive corporate pay. But in her foreword, Theresa May reassured employers that her party remains "unequivocally and unashamedly pro-business" and that the motivation for reform was to protect the reputation of the free market at a time of surging wage inequality. It should not surprise us, then, that proposals published today in response to that consultation offer little more than superficial changes that give the appearance of reform without actually affecting it.

The centrepiece of the government's plan is a new requirement for listed companies to report on the ratio of CEO pay to the average pay of their workforce, along with a narrative to explain the gap and changes to it. At a time when executive pay among FTSE 100 companies has surged to 128 times that of the average worker (from 47 times that of the average worker 18 years ago), this policy falls radically short of requiring companies to take action on the fair distribution of the wealth produced by the UK.

Gone are last year's headline-making proposals to place workers on company boards, which the government has been backtracking on ever since, and in its place the promise of yet another consultation. This time, the government will invite the Financial Reporting Council (FRC) to consult on the much-watered down proposal to introduce a new requirement for premium listed companies to either designate a non-executive director, a formal employee advisory council, or a director from the workplace to speak on behalf of workers. What's more, the government has proposed that this principle should be recommended on a "comply or explain" basis, offering a potential get-out clause to companies that will not even go that far.

Despite evidence in a 2007 report from the FRC that only 33% of listed companies are fully compliant with the UK Corporate Governance Code, much of the governments "reforms" are based on tinkering with these effectively voluntary rules to give more specific recommendations on how companies should approach executive pay, including a broader role for remuneration committees to explain corporate pay policies to the workforce.

Elsewhere, companies of "significant size" will be asked to explain how their directors have regard to employee interests, and to publically disclose their corporate governance arrangements, including their adherence to any formal code.

Nowhere among the many proposals to improve transparency over pay inequality does the government propose any mechanism to change it, and nowhere does the government mention the role of trade unions in employee engagement and in negotiating pay. The government announced it will continue to work on corporate governance by encouraging industry bodies to find new solutions, but it has not proposed any such engagement with the trade unions that represent millions of workers across the UK.

The best structures available to strengthen workers' voices already exist in the UK in the form of trade unions, and the most effective way to increase the real value of average wages – sectoral collective bargaining, in which trade unions and employers' associations negotiate pay and conditions at industry level – was once in widespread use.

Strengthening trade union rights and reinstating sectoral collective bargaining were two of the key recommendations put forth in the Institute of Employment Rights' Manifesto for Labour Law project, in which we brought together leading lawyers and academics from some of the UK's most prestigious universities to draft a comprehensive package of reforms. These recommendations have since been taken forward by the Labour Party, and were included in its 2017 General Election Manifesto For the Many; Not the Few.

The overarching aim of our proposals is to shift the focus of labour law from a reliance on individualised statutory rights to the negotiation of labour standards through collective bargaining processes, as is the norm across many of the strongest European states. This effectively provides workers with a voice at all levels of industry, resolving the inherent imbalance of power between employers and workers which, left unchecked, leads to the very situation the government is ostensibly attempting to correct – one in which those at the top take home too much; and those at the bottom take home too little.

However, such reforms require the political will to look outside of the neoliberal paradigm. With these weak proposals, Theresa May risks appearing to prioritise the reputation of the market over its fair operation, and in her ideological determination to keep that market "free" she avoids all the reforms that could more effectively tackle the problem she sets out to address.