MP Chris Philp’s report advocating shareholder committees is a welcome contribution to governance reform in the light of Prime Minister May’s strong intentions to ‘do something’. Whether such committees can lead to a reduction in excessive and unjustified executive remuneration is an open question but it has the great merit of fresh thinking. In the area of governance and pay, fresh thinking is much required.
The BIS Committee announcement of their review of corporate governance, focussing on executive pay, directors’ duties, and the composition of boardrooms, including worker representation and gender balance in executive positions has now set the scene for new ideas and Philp’s proposals are thus prescient.
Shareholder committees could be a further link in the investment chain that binds the practices of company boards to the primary interests of shareowners. Greater scrutiny by shareowners can add critical insight to the process of remuneration setting with the involvement of other stakeholders including employees.
How might it work? First, electing their members annually from the AGM is vital for legitimacy and governance accountability, or even election every three years to coincide with the remuneration policy vote. A good example of this is set by how the employee director at First Group is elected. Second, the committee could be drawn from a wider base than just asset managers, as in Philp’s current view. It must be said that asset managers have not distinguished themselves so far in the exertion of downward pressure on spiralling upwards pay. In my view such a committee would greatly benefit from employee representatives, again drawn from the company’s own ‘shop floor’.
Who would qualify? The committee candidates must be existing shareholders or their representatives and elected through a shareholder wide ballot, such as directors, through presenting a CV to the ‘electorate’ and stand on their merits. There could even be ‘hustings’ at the AGM followed by a ballot.
What would be their remit? Certainly to receive reports on planned remuneration payments and policies from the Board or its committees.Also, to review pay across the company and to make recommendations on contracts, executive recruitment and the gamut of pay metrics. The committee could provide their own report for the AGM and be furnished with the resources to consult the shareholder base too, perhaps with bi-annual meetings open to all shareholders. In addition as Philps’ advocates, they could also operate as shareholder nomination committees. The Swedish model provides guidance and practical experience here. The committee would oversee the search for, scrutiny, nomination, election and behaviour of new board candidates. Just think, they might even authorise the advertising of board positions, just like any normal job!
What kind of safeguards might be required? Clearly the normal framework of the law would operate and a possible recall mechanism could be devised to deal with poor performance by the committee or one or more member. Their reports should be tabled as part of the AGM agenda for shareholder vote. A review mechanism for a rejected SC report would be needed too.
Challenges? Shareholder committees may not be the panacea for excessive and unjustified executive pay, but nothing else has worked so they should be given a chance. Shareholder scrutiny that is itself accountable to the wider shareholder body will bring unique pressure on poor pay schemes and arrogant executive action. It will also reward boards trying to do the right thing and strengthen its voice within the wider company body. It would certainly give a better chance of re-balancing executive pay to create a better equilibrium between executives and shareholders where both can benefit responsibly.
We are cursed in the UK with a corporate culture where experiment is rare and a deeply held scepticism about change seems to be ingrained in our publicly listed companies. Shareholder committees may be a bridgehead into a new dynamism for such companies to break into a new world of responsible entrepreneurialism more suited to the 21st century and herald much needed reform. The Prime Minister should give them a chance.
Alan MacDougall is Managing Director at PIRC Limited. He can be contacted via email.