A new wind is blowing down Downing Street. The leadership of the Conservative Party has skipped back a track, with a generation born in the 1960s whose ideas were shaped by the Thatcher era replaced by one born in the 1950s that emerged into political consciousness in the years of Heath, Wilson and Callaghan. The young Theresa Brazier – later to become Mrs May – was studying for her A levels when the first of these branded Tiny Rowland as “the unacceptable face of capitalism”.
Tiny Rowland was engaged in a battle with his own non-executives at Lonrho at the time, dismissing them as “Christmas Tree Decorations”. Theresa May is now sharing the popular outrage at the conduct of Sir Philip Green and Mike Ashley and calling for changes to address “irresponsible behaviour in big business”, in particular to protect the interests of employees and to challenge excessive executive pay. It is interesting to compare the targets of the two prime forty three years apart: Heath was criticising the chief executive of a company whose non-executive directors were standing up to him, whereas Theresa May’s challenge is to behaviour exemplified by a former chief executive who owned, or rather whose wife principally, owned the company, and a second chief executive who is a majority shareholder but who appears to have the chairman and board in his pocket.
Mrs May’s pronouncements, aided by such high profile cases as BhS and Sports Direct, help to change the climate. But is this sustainable, and are the solutions being canvassed the right ones? Philip Augar, writing in the FT on 22nd August, noted
In her last major speech before entering Number 10 as prime minister, Theresa May eerily echoed remarks made by the former Labour premier Tony Blair 20 years earlier: “Transient shareholders are not the only people with an interest when firms are sold or closed,” she said. “Workers have a stake, local communities have a stake, and often the whole country has a stake.”
Mr Blair, in a speech delivered in Singapore shortly before he took power, asserted that it was “time to assess how we shift the emphasis in our corporate ethos . . . towards a vision of the company as a community or partnership in which each employee has a stake”.
Augar went on to point out that “what had promised to be a defining philosophy for New Labour was scarcely heard of once he was in office”. Admittedly, section 172 of the 2006 Companies Act did shift the ground by requiring directors to:
have regard (amongst other matters) to—
- the likely consequences of any decision in the long term,
- the interests of the company’s employees,
- the need to foster the company’s business relationships with suppliers, customers and others,
- the impact of the company’s operations on the community and the environment,
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of the company.
Nonetheless, Augar’s point about lack of delivery is well made, given precisely the types of issue that the new prime minister has declared that she wants to address.
Her ambition to reform corporate governance is admirable. But are they right solutions? The FT reports today (25th July):
The prime minister’s allies say that a package of measures to improve corporate governance are being drawn up and will be published in the coming weeks.
Mrs May this month promised to broaden the pool of non-executive directors, so that they were no longer drawn from “the same narrow, social and professional circles as the executive team”.
“If I’m prime minister, we’re going to change that system and we’re going to have not just consumers represented on company boards but employees as well,” she said.
The idea is opposed by some corporate leaders, who fear that “worker directors” would end up being selected by trade unions. Mrs May’s team say they would act as a deterrent to the “appalling” working practices adopted by Sports Direct, which were heavily criticised by MPs this month.
Mrs May’s reforms are also expected to include a requirement for more transparency on pay, including making shareholder votes on corporate pay not just advisory but binding. “Pay multiple” data would also be published to show the gap between a chief executive’s pay and those of workers.
The new prime minister has also talked about toughening competition law to protect consumers and a further crackdown on corporate tax avoidance and evasion. “It is not anti-business to suggest that big business needs to change,” Mrs May said at the launch of her leadership bid.
There is some very good stuff here, including ideas about widening the pool of non-executive directors, but a lot more thought is required about how this should be done, and what would be the most effective way of ensuring that what is done addresses the problems identified. For example, appointing a token employee director may be a less effective way of addressing the need to represent employee’s interests than having an effective workforce or HR director on the board whose job it to take into account the need to meet the needs and desires of all the workforce, and couple this with greater protection of employee rights, not least around working conditions and pensions.