The U.K.’s Business, Innovation, and Skills (BIS) Committee has recently announced that it will be launching a formal inquiry into corporate governance. Specifically, the committee will be focusing on the issues of directors’ duties, executive pay, and boardroom composition. The BIS committee is focusing on these factors because they encapsulate a wide range of corporate governance concerns being expressed in the U.K. and worldwide as well.
There is often a difference between abstract, ideal corporate governance policies and the way that they actually manifest in practice. Such an inquiry may help reveal the changing dynamic between directors and shareholders and help them better understand each other’s interests.
In particular, special attention will be given to the area of executive pay, especially in light of recent shareholder disputes and revolts. The inquiry arrives at a very timely moment, given the volatile economic climate and series of financial crises in Britain.
Terms of Reference for the Corporate Governance Inquiry
The BIS Committee’s corporate governance inquiry will be guided by over 20 questions which can help stimulate discourse with directors and uncover important governance information. The questions are classified under three main categories. Below are examples of different inquires for each category (click here to see the full list of terms of reference for the inquiry):
- Is the duty to promote the long-term success of the company clear and enforceable?
- How are the interests of shareholders and current and former employees best balanced?
- Is there any evidence that more diverse company boards perform better?
- How should greater board membership diversity be accomplished? What factors should be included in considering diversity (e.g., gender, ethnicity, age, experience, etc.)?
- What more should be done to increase the number of women in executive positions on boards?
- In what ways should executive pay take into account the long-term performance of the company?
- Is there any evidence that executive pay rates are too high? Should the government seek to influence/control executive pay? If so, how?
Specifically, great interest is already being expressed with regards to the issues of women on boards and government intervention in executive pay. For instance, Iain Wright, chair of the BIS Committee, states that pay awards to senior executives are not only “vastly bigger than workers could ever expect to receive,” but often appear to have “very little relationship to company performance.”
Context of the BIS Corporate Governance Inquiry
There are several factors which have culminated in the call for a governance inquiry in the U.K. For instance, the inquiry follows various developments which occurred over the summer of 2016, including GC100 and Investor Groups’ guidance on remuneration reporting, as well as the Executive Remuneration Working Groups’ Final Report on existing executive pay structures.
Other highly decisive factors include:
- Recent commitments from Prime Minister Theresa May to overhaul corporate governance in the U.K.
- Increased scrutiny of, and a call for stricter checks on, executive pay
- Various perceived corporate governance failings, such as the shareholder disputes connected with BP’s executive pay packages
- Overall instability in the wake of financial crisis and the Brexit vote
Anticipated Effects of the Inquiry
The inquiry is intended to stimulate widespread improvements in reporting and engagement in the U.K. Particularly, one of the main interests of the inquiry appears to be the extent of government involvement in executive pay. Since the terms of reference specifically list this subject, there may be indication that the BIS Committee may be willing to support a more comprehensive regulation regime than the one currently in place.
As with any major overhaul, one of the main concerns here is to ensure that any new regulations or requirements resulting from the inquiry are properly implemented. This is a common theme that arises frequently in the discussion of corporate governance. For instance, with regards to governance policies in China, some analysts are attributing corporate failings in the recent Vanke takeover to regulators’ failure to implement new regulations over major listed corporations.
While some may opine that the BIS inquiry is somewhat late, it is at least a step in the right direction to promote transparency and to facilitate shareholder engagement. Wright says that poor corporate governance not only “ill serves workers” but also “tarnishes the reputation of business” and “undermines public trust in enterprise.”
Thus, corporate governance is necessary not just for preventing irresponsible business behavior, but it also serves to help stabilize volatile investing conditions, as investors are less likely to invest in enterprises they don’t trust. If you have any outstanding questions or concerns regarding the ongoing global discussion of corporate governance, contact us at Kessler Topaz. We have helped our clients achieve effective governance changes regarding issues such as director elections, succession planning, executive compensation policies, and other important areas.