29 November 2016

The government has today launched a consultation into corporate governance and executive pay, but the green paper published on the matter shows the government has watered down some of its pro-worker rhetoric.

When she took on the mantle of Prime Minister earlier this year, Theresa May attempted to re-brand the Tories as the "party of workers", but it seems her apparent enthusiasm for employment rights was short lived.

"The government I lead will be unequivocally and unashamedly pro-business," she wrote in the introduction to today's green paper, framing the debate into executive pay and fair working conditions as one that must be had in order to save the reputation of our employer-led economy, rather than for the benefit of the UK's 31 million workers.

"For people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public", she explained, promising "a new approach to strengthen big business" through reforms on how executive pay, worker and consumer voice, and the governance of privately-held business is addressed.

Executive pay

On executive pay, the government noted that total pay for the CEOs of FTSE 100 firms has increased from being 47 times to 128 times that of the average worker over the last 18 years. However, the paper held back from criticising this inequality by describing the resulting public outcry as down to a "widespread perception" that executive pay has become increasingly disconnected from the pay of ordinary workers and company performance.

In 2013, the government introduced shareholder votes on executive pay packages every three years, which it appeared to admit had not gone far enough, with 28% of shareholders for FTSE 100 companies not using their vote, and an average of 93% supporting the decisions of the board (thus failing to keep hefty payouts in check).

In our publication The Mythology of Business, author and Professor of Socio-legal Studies at the University of Liverpool David Whyte points out that the pay received by the average FTSE 100 CEO increased by 15% between 2012 and 2013, a year dubbed the shareholder spring after four companies had their executive pay reports rejected. Whyte's analysis goes on to demonstrate that so far shareholders have not been found capable of holding executives to account on huge payouts.

However, almost all of the options for reform provided in today's green paper deal with making shareholders accountable for executive pay, with nods towards making directors' pay more transparent, improving the connection between pay and performance, and the possibility of encouraging renumeration committees to 'consult' with the company workforce before setting wages at the top.

U-turn on stronger worker representation

Earlier this year, Theresa May pledged to increase workers' voices by giving them a seat on company boards, but following a backlash from industry, she has backed away from these proposals. Indeed, in today's green paper, worker representatives on boards were offered as one of many options for reform, but the government distanced itself from the idea, saying: "These models will not work for every company. As the Prime Minister has made clear, we are therefore not proposing to mandate the direct appointment of employees or other interested parties to company boards."

Apart from some tokenistic proposals to offer non-executive directorships to workers, or to set up 'advisory committees' on which workers could sit, few options are offered to improve workplace democracy or give workers a say on executive pay.

In our Manifesto for Labour Law, the Institute of Employment Rights argues that workers should be represented at all levels of the economy, through collective bargaining at enterprise and sectoral levels, a reinstated Ministry of Labour, a seat on a National Economic Forum, and by having a stronger voice on company boards.

The Manifesto, which includes 25 policy recommendations now adopted by the Labour Party, asserts that "there has been much complacency and too much focus on the interests of shareholders" when it comes to corporate governance. The authors - comprising 15 academics and labour lawyers - recommend that directors' obligations should include a duty to enhance and protect the interests of workers of at least equal weight of that owed to shareholders; that every board should include a workers' representative with the same rights of other directors; and that workers should be given a minimum percentage of the vote in general meetings of the company.

A tokenistic approach to workers' rights

General Secretary of the TUC Frances O'Grady said today: "In countries that have workers on boards, which is the majority in Europe, it shows that they have better investment in R&D, better investment in skills and they tend to take decision that are more about the long term, because of course, workers are champions of the long-term success of a company because their livelihoods depend on it." She described the government's proposals as being akin to "having a glorified suggestion box".

Shadow Business Secretary Clive James said: "Sadly, this green paper looks like offering tokenism rather than a much-needed call to action.

"The real test has to be whether these proposals would have saved jobs and pensions at BHS or prevented the gross mistreatment of staff at Sports Direct, and whether they’ll tackle the scourge of low pay and escalated executive pay. Anything that falls short of doing that is just not good enough."

An official response to the consultation will be made by the Institute of Employment Rights and published once the call for evidence has closed.

Click here to read more about our Manifesto for Labour Law and purchase your copy