Hugh Wheelan: Theresa May’s new corporate governance government

The incoming UK Prime Minister pitches governance reform

After two weeks of post Brexit political turmoil in the UK, few people would have predicted that the end result would potentially be a major overhaul of UK corporate governance law.

But, speaking as she launched her leadership campaign in London yesterday, Theresa May, who will today become the UK’s new Prime Minister, pulled several governance rabbits out of her hat.

Striking up a theme of making businesses more ‘responsible’ – no doubt in response to anti big business/finance sentiment partly behind the Brexit vote – May said she wanted to see consumer and employee representatives on company boards, as well as legally binding shareholder votes on remuneration.

In addition, she called for full disclosure of bonus targets and the publication of data showing CEO compensation as a multiple of a company’s average pay and criticised the effectiveness and independence of non-executive directors, adding that they “are often drawn from the same narrow social and professional circles as the executive team”.

“It is not anti-business to suggest that big business needs to change,” May said.

RI welcomes the statements from new Prime Minister May, while noting caveats from responsible investors.

Much of what May suggests is not new. Trades unions have been arguing for what is ironically a more European-style ‘paritary’ board of employees and directors for decades. Indeed, a number of the same issues are being pushed in the revised EU Shareholder Rights Directive, which, of course, now may not apply to a Brexited UK, while the average pay issue comes into law in the US next year.

May was among Tory MPs who in 2014 worked to rein in proposals made by then business secretary Vince Cable to curb growing executive pay. Former Labour party leader Ed Miliband, too, had his own take on the themes at the last general election.

But, such governance changes have rarely been so close to the lips of the UK’s political leader.

Governance championing fund managers were quick off the block to respond. Piers Hillier, Chief Investment Officer at Royal London Asset Management, said: “If Theresa May is serious about this we expect to see concrete proposals, addressing the governance issues found in British boardrooms.” However, he echoed concerns within some UK managers about annual pay votes: “We believe imposing an annual binding vote could be detrimental, forcing shareholders to focus on shorter performance periods when evaluating whether performance has merited the remuneration paid to senior executives.”And he used the opportunity to further the agenda: “Now is the time to not just tackle the issue of executive pay but other key issues such as succession planning and future proofing of businesses, ensuring long-term value is delivered to shareholders.”

Even the lobby group, Institute of Directors, responded by saying “workers on boards can bring benefits” though it would stop short of making it compulsory.

It all begs the question of who is advising May on her new found corporate governance zeal (May was previously Home Secretary [Interior Minister], and therefore not close to governance issues).

One clue could lie in the fund management background of her husband, Philip May, a Relationship Manager at Capital Group, the US funds house. May has been in a client relationship role for decades, previously at Deutsche Asset Management. He is no doubt in tune with the undercurrents of the Stewardship Code and initiatives such as the Red Lines Voting of the UK Association of Member Nominated Trustees, that are gaining currency among pension funds and asset managers. Expect more action here.

May’s words drew warm reaction from Eurosif, the European responsible investment umbrella group. Executive Director Flavia Micilotta said her organization “looks favourably at an enhanced focus on UK boards’ accountability which echo today’s European policy discussion”.

As an interesting aside, May’s rival in the Conservative party race to be Prime Minister, Andrea Leadsom, spent ten years as Head of Corporate Governance at Invesco Perpetual, the UK fund manager. More tangentially, Invesco was also a fund management berth in the early 2000s for Douglas Carswell, the only UK MP for UKIP, who worked for Invesco Asset Management (Continental Europe) as Corporate Development Manager.

His boss at the time was Jean-Baptiste de Franssu, now head of the Vatican’s €3.2bn bank, which is developing a set of socially responsible investment criteria for investing in equities. I digress…

A number of fund managers and banks warned after the UK’s Brexit vote that inequality in the country was one issue behind the discontent that led to the shock vote.

There’s a lot of meat to put on the bone of one speech by the new Prime Minister. But as the country looks to heal the rift in popular opinion on EU membership, and to make sense of its current political mess, it could do with some sensible and meaningful corporate governance reforms.

With reporting by Laurie Havelock.