A hard-hitting Parliamentary report on corporate governance has slammed levels of responsibility and accountability among UK business leaders. Published on 5 April by the Business, Energy and Industrial Strategy (BEIS) Committee, the report highlights a “worrying lack of trust” in businesses among the public and calls for a “major expansion” of the role and powers of the Financial Reporting Council.
In particular, BEIS Committee chair Iain Wright MP pointed out, “The rise of ‘ownerless companies’ – where no single investor has a sufficiently large stake in the business to act as a responsible owner, checking performance and behaviour – provides a significant challenge to sound corporate governance. Successful, productive and profitable companies cannot be disconnected from society.”
Even more damningly, he noted: “Executive pay has been ratcheted up so high that it is impossible to see a credible link between remuneration and performance.”
But with ownerless firms and exorbitant pay arising largely as creatures of commerce, and a government in place that is unlikely to challenge those trends of market forces, is it too late to restore responsibility? Indeed, what could – or should – be done to restore public trust?
The Institute of Leadership & Management's head of research, policy and standards Kate Cooper says: “There are two, strong themes that emerge from this report: one, the problem of faceless ownership and, two, a genuine question of whether there’s any interest among owners and shareholder in the “mission”, or whatever it is, that organisations are trying to deliver. We know that, on average, shareholders trade their shares every six months – so what does that tell us about their broader commitment to securing high ethical standards among the firms in which they invest?”
Cooper explains: “A great way to assess the fairness, or otherwise, of an executive-pay package is when it’s represented as a ratio of the lowest-paid in the organisation. Maybe you really do think you’re worth 500 or 1,000 times more than your lowest-paid employee – but I think you need a very strong and persuasive justification, not only to explain why that’s the case – but how you can keep on saying things like ‘We’re pulling together as a team’, or ‘We’re all in this together’. How can you possibly motivate staff when you’re being paid so much more than they are that you’re in a completely different orbit?”
Added to that, Cooper notes, “trust takes years to build up, but can be lost in a second. After that, it will take years to build back up again. And this is why honesty and transparency – ‘Yes, I am worth thousands of times more than my lowest-paid employee, and these are the reasons why’ – are so valuable. Make a compelling and satisfying argument, rather than merely trotting out the lines that so often recur in this debate, such as ‘Everyone else at this level is getting huge amounts, so we have to be competitive in order to retain talent.’
“The links between payment on one hand, and performance or delivery on the other, are tenuous at best. So what’s required is a transparent reward policy that the chief executive or the senior management team are able to justify, and that stands up to scrutiny. That policy needs to convey why those people, specifically, need to work there – and why it can’t be someone else who’s receiving a half, quarter or even a tenth of that salary.”
For further thoughts on responsibility, check out this learning item from the Institute