prime minister – Escondido Framework

Corporate Governance Code: “the mountain in labour has brought forth a mouse”

Parturient montes, nascetur ridiculus mus[1]

It’s bit harsh to describe the Financial Reporting Council’s new Corporate Governance Code as a “ridiculous” mouse, but after the hopes raised by Mrs May on the steps of Downing Street two years ago for real reform to corporate governance and the effort expended in consultation since, this reform is timid, diminutive and disappointing.

It is hardly surprising. The Prime Minister’s original challenge to the corporate world was muddled. She faced plenty of reasoned opposition to specific ideas she floated. The scandals that probably spurred her to fly the kite for reform have faded with the passage of time. Brexit has diverted attention from almost everything else.

Nonetheless, the new code includes some steps forward. There is a some modest recognition of the wider duties of the company beyond those of the shareholders in the new Principle A:

“A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.”

There is a further new provision which requires that a board should:

“…..understand the views of the company’s other stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making.”

The reminder to boards of their duties under Section 172 is welcome, but the new code falls well short of the proposals described on this site for the creation of a commissioner with power to refer companies to the Secretary of State, on application from stakeholders who could demonstrate that companies had failed to engage with Section 172. The provision in the 2018 Code has a declaratory value and will focus the attention of company secretaries and communications teams on crafting suitable words, but it lacks the backup of teeth or sanction.

The 2018 Code contains some new provisions for remunerations committees, but they are weak and do little to address the problems of runaway executive pay. Encouragement of “review of workforce remuneration and related policies and the alignment of incentives and rewards with culture” and the requirement that chairs of remuneration of committees should first have served for at least 12 months on a remuneration committee is unlikely to make one iota of difference to outcomes. These are unlikely to shift the behaviour of remuneration committees, which requires changes to the accountability of directors (as addressed elsewhere in the Escondido Framework) and a more courageous and challenging approach by the members of remuneration committees to the settlements that they are expected to endorse.

The 2018 Code pays lip service to the Prime Minister’s support in 2016 for the 1970s panacea of worker representation on boards:

“The board should keep engagement mechanisms under review so that they remain effective. For engagement with the workforce, one or a combination of the following methods should be used:

a director appointed from the workforce;

a formal workforce advisory panel;

a designated non-executive director.

“If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.”

We have explained the drawbacks of these approaches elsewhere: conflicts of interest, undermining of the unitary board, challenge of adequately representing the diversity of workforce, and – core to the model of the firm described the Escondido Framework – a failure to understand the relationship of the firm to all its “stakeholder” groups.

However, if any company is looking for “alternative arrangements” that address the criticisms set out above of the Code’s approach to workforce engagement, we commend the approach described in our letter to the Financial Times on 3 November 2017 and response the Green Paper on Corporate Governance.

[1] “the mountain in labour has brought forth a ridiculous mouse” Horace: Ars Poetica, 136–9

“You can’t have it both ways, Prime Minister”

“we should never forget the immense value and potential of an open, innovative, free market economy which operates with the right rules and regulations” (Theresa May, at an event to mark 20 years of the Bank of England’s independence)

With the Leader of the Opposition due to demonstrate his lack of understanding of markets in his keynote speech to his party conference yesterday, it was only natural that the prime minister should use the opportunity given by an invitation to speak at an event to mark the granting of independence by, ironically, a Labour chancellor of the exchequer to the Bank of England, to mount a defence of the market economy.

But what conclusion are we to reach about someone who manages to contradict herself so thoroughly, not just from speech to speech, or within one speech, or within a paragraph, but within a single sentence. When does oxymoronic become plain moronic?

Wikipedia helpfully spells out the roots and origin of “oxymoron”, and its evolution. “An oxymoron is a rhetorical device that uses an ostensible self-contradiction to illustrate a rhetorical point or to reveal a paradox. A more general meaning of “contradiction in terms” (not necessarily for rhetoric effect) is recorded by the OED for 1902.” There is no possibility that the sentence from her speech, quoted at the head of this posting, is a rhetorical device. Markets are either regulated or they are “free”. Definitionally, they cannot be both at the same time.

One of the axioms underpinning the Escondido Framework is that, in the absence of a raft of elusive conditions (perfect information, symmetry, “unbounded” rationality, perfect competition etc), regulation is always required to make markets work sustainably. Mrs May has indicated clearly since becoming prime minister that she appreciates this instinctively. Am I being too generous to her in wondering whether her apparently casual use of language is a calculated sop to appease the more bone-headed in her party (which gathers for its own conference in Manchester later this week) and they will only hear the word “free” and not notice the reference to “rules and regulations”?

I can’t help wondering what was going through the civil servants’ minds when they inserted the heading “A well-regulated free market” into the published text[1] of the speech. Cock-up or conspiracy? While stepping through the black door of Number 10 feels a bit like stepping through a looking glass and tumbling down a rabbit-hole simultaneously and, in serving their political masters, civil servants are required to “believe impossible things” [2], the combination of “well-regulated” with “free” is so impossible that conspiracy seems more plausible than cock-up. If so, to paraphrase the Queen of Hearts,“Off with their heads!”

[1] https://www.gov.uk/government/speeches/pm-speech-at-20th-anniversary-of-bank-of-england-independence-event

[2] “Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.” Alice in Wonderland.

“Irresponsible behaviour in big business” – “Unacceptable face of capitalism” remastered?

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 22^nd 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 (25^th 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.