Championing renewed leadership in governance and business practice

7^th March 2017

It didn’t get to the point where we saw ‘Save Unilever’ held aloft on placards outside Downing Street, yet there was widespread unease about Kraft’s now abandoned takeover of UK-Dutch consumer goods giant Unilever.

Clearly many people still have misgivings about Kraft given its previous track record with another British favourite Cadbury’s. However, there may be several positives to take from the public and press concerns. It may also indicate that an appreciation of Unilever’s economic contribution to the economy including jobs, investment and research and development underpinned the worries about the loss of a company viewed as well run and governed with a strong sense of purpose.

For now at least, we will not see the ownership of another large UK business – and some might say institution – moving overseas. Yet the weak pound and the nature of our corporate model means many more multi-nationals and overseas investors could be looking to the UK to snap up bargains.

This has implications for the government’s industrial strategy because of its impact on the UK’s ability to retain and develop anchor businesses with the associated centres of R&D and supply chain prime contracting. It certainly suggests an urgent need for an assessment of where potential threats to this corporate infrastructure.

On a brighter note, the support given to Unilever could provide a foundation and source of ideas for rebuilding trust in business more generally.

Much trust has been stripped away following a maelstrom of malfeasance most recently revelations about the business practices at Sports Direct and the failure of BHS. Concerns remain about the banks whose behaviour was a key driver of the financial crisis a decade ago but which keep making headlines for the wrong reasons.

The continued rocketing levels of executive pay and rewards despite flat-lining pay for everyone else has created a widening gulf between the few at the top and everyone else. Edelman’s latest annual trust barometer, published at the start of the year, shows faith in the corporate world continues to fall while only two-fifths of people think CEOs have any credibility. Executive pay has puts this up in lights.

At ResPublica’s recent event addressing these concerns – Bonuses, Boardrooms and the Bottom Line – there was noticeable degree of unity from politicians across all parties on the salience of these concerns.

As Conservative Richard Fuller MP, member of the BEIS Select Committee, put it, there’s a “chilling wind” in the corporate world as the social contract that has held sway begins to break.

Rebuilding trust is both urgent and critical for corporate Britain. Re-establishing trust can help foster an environment in which companies can be profitable in a way that also promotes long-term social and public gains which in turn gives companies a way to maintain their profitability. We should be seeking ways to turn what is a vicious circle of declining trust and customer and consumer discontent into a virtuous circle beneficial to all.

How can this be achieved? The government believes some of the answers come through proposed corporate governance reforms laid out in its Green Paper.

These include strengthening shareholder engagement and voting rights, strengthening remuneration committees including more engagement with shareholders and employees, publishing pay ratios and improving the effectiveness of long-term pay incentives. The government also wants to extend the principles of the corporate code to privately owned companies.

These reforms are linked to the broader industrial strategy of encouraging companies that invest in long-term growth with models that create and spread wealth, including those left behind.

Are these reforms sufficient? On the subject of executive pay, or “executive greed”, as Sir Vince Cable, former Business Secretary put it, publishing pay ratios, requiring more votes on pay and enabling more shareholder input could increase scrutiny and put some downward pressure on pay awards.

But as the Government’s Green Paper itself acknowledges, the influence of UK shareholders only goes so far as overseas investors now hold 54 per cent of the value of the UK stock market. This has increased from 31 per cent a decade ago. Of course, some overseas investors – pension funds for example – may well have concerns about executive remuneration yet it is likely that domestic investors will see it as a bigger priority. In addition, some measures that might have brought additional pressure to bear such as workers’ representatives on company boards, have been dropped for now.

As Aimee Donnellan, business correspondent at the Sunday Times, highlighted at the event, what angered CEOs more than any other issue in recent debates about corporate governance, was the prospect of having to answer to a worker on the board. The government, having initially supported this proposal, blinked first.

As former Shadow Business Secretary Chuka Umunna MP pointed out at the debate, if a CEO had to describe to a worker representative why the salary package was necessary, it might provide an interesting counterpoint to what is perceived as group think on pay, even from remuneration committees.

As the Institute of Chartered Accountants in England and Wales (ICAEW) highlighted during the debate, there is no basic principle in the code demanding that the employee voice is heard in the boardroom. Yet, given that employees often represent the essence of the firm and the main point of contact with customers, why is the voice not heard at the highest level? Indeed, some businesses not only give employees a voice but give employees ownership too with Grant Thornton a notable recent example of a company that has made this change.

Studies repeatedly point to employee engagement and involvement at all levels as integral to more effective operations and productivity. Employee involvement increases self-worth and help distribute wealth. For example, would restaurant chains deny their staff their tips if those employees were owners of the company?

Another driver of runaway pay is benchmarking. As Sir Vince said, it is mathematically impossible for every executive to be in the top quartile yet this is an pillar of executive pay benchmarking. However, a reworked approach to benchmarking could have an influence if it was focused on a series of measures which help identify the long-term purpose and ethos of companies.

As the Green Paper notes, businesses in all sectors operating in the UK with a turnover of £36m have to disclose what they are doing to prevent modern slavery in their own business and supply chains. This year employers with more than 250 employees will have to report on gender pay and large companies will have to report on prompt payment practices.

So why stop there? Should we not be thinking more systematically about what we expect of business? Could we construct a set of concrete standards that companies can adhere to, perhaps adapted to their sector and linked to the size of business. These standards could encompass pay, voice, diversity, governance, transparency, training and where appropriate core sector practices. A company trading as a PLC – would have specific requirements on governance and duties to shareholders in comparison with a privately held firm. Yet we could also seek to establish commonality with a baseline for all business types that it would need to be meet or be reported against. These common standards would provide a baseline for behaviour which could apply to diverse forms of businesses even when the diversity is increasing.

In Sweden standards are seen as necessary and part of economic growth, and as a recent Government report outlines: “Corporate social responsibility (CSR) is a self-evident part of a modern industrial policy. In line with this, the Swedish Government has drawn up a more ambitious CSR policy…[and outlines the expectations for businesses on]…human rights,  decent working conditions,  environmental considerations and anti-corruption efforts, as well as gender equality, diversity, business ethics and taxation.”

New models like B-Corps and social enterprises are speaking to different ways of embedding purpose with different governance.  As the Government has identified, with PLCs diminishing in number, the code is less influential, and with more private businesses including PLCs going private, there is a need to look much more broadly. This includes recognising that failures have happened not just in the PLC model but in private companies (BHS) and with co-operatives (Co-op Bank).

Equally, the huge (tech) founder companies are creating models challenging existing corporate governance norms, such as withholding shareholder voting rights as the FT has highlighted recently. A clash could be coming if these companies seek a listing in the UK. This will need resolution but common standards, if they win widespread acceptance and prove their effectiveness could help convince others of their benefits within and beyond the businesses themselves.

The idea of a standard linked to the purpose of a company can also help improve transparency. As the ICAEW said in its submission to the BEIS Select Committee inquiry into corporate governance, media scrutiny is an important driver of change. Companies could be held to account on the basis of the standards, though we may have to accept that it will be the executive pay story that is likely to command most of the headlines for now.

However, it surely makes sense to aspire to a less confrontational and more collaborative system which recognises and harnesses a range of drivers of better governance that should support business performance too – greater employee voice, stronger investor voice, smarter benchmarking and more reporting on standards and greater transparency. The result would be a broader, more ambitious idea of business purpose and governance.

There could be tax and other incentives to support and accelerate change. Indeed, government procurement processes are beginning to reflect this but could be developed further.

One area we may want to look at is the possibility of tax incentives which encourage companies to adopt governance and processes which in turn root investment in the UK. This could appeal to UK businesses and indeed help convince foreign owned businesses, who may take advantage of the fall in sterling, to maintain their operations here.

Businesses themselves and business organisations, not just government has a role in supporting a renewed purpose. The CBI, for example, has previously championed the need to rebuild trust in business and has an obvious leadership role.

But, what of the Brexit backdrop with the UK seeking to bang the drum for new investment here. Some argue that changes in regulations could put off investors, yet a counter argument is that new opportunities and benefits could flow from a more sustainable business culture particularly once such benefits are demonstrated.

The UK can build on its reputation for governance leadership through the code with renewed and ambitious leadership. It could provide the UK with a USP to provide a new framework underpinning the plurality of business models (including that the UK is a global centre for new tech companies) and benchmarks for good practice and governance.

The UK could be a global lighthouse for enabling economic and business models to serve citizens better and in turn be a beacon for domestic and international investment. Supporting a stronger governance and businesses framework will help bring wider public and economic benefit including the longer-term growth and shared prosperity that the Prime Minister Theresa May seeks.

ResPublica aims to lead this debate providing space and generating new thinking on how we can promote these business models and business leaders that have won the public’s trust and confidence to allow them to deliver the prosperity we all need in the years ahead.