Today, Andrea Leadsom MP dropped out of the Conservative leadership contest, and Theresa May MP was shortly thereafter confirmed as the Conservative Party leader. David Cameron has stated that he will resign as Prime Minister on Wednesday the 13th July, meaning that Theresa MP will likely become Prime Minister later that day.
From a company law point of view, the significance of this is that, on the 11th July 2016, Theresa May gave a speech launching her campaign to be party leader and Prime Minister. That speech contained a number of company law-related pledges – below are the relevant quotes:
- ‘And I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders. In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So 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.’
- ‘The fourth way in which I want to make our economy work for everyone is by getting tough on irresponsible behaviour in big business…. The FTSE, for example, is trading at about the same level as it was eighteen years ago and it is nearly ten per cent below its high peak. Yet in the same time period executive pay has more than trebled and there is an irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses.’
- ‘So as part of the changes I want to make to corporate governance, I want to make shareholder votes on corporate pay not just advisory but binding. I want to see more transparency, including the full disclosure of bonus targets and the publication of “pay multiple” data: that is, the ratio between the CEO’s pay and the average company worker’s pay. And I want to simplify the way bonuses are paid so that the bosses’ incentives are better aligned with the long-term interests of the company and its shareholders.’
Here are a few initial thoughts on some of the reforms proposed by Theresa May:
- The most radical reform proposed is to have employees represented on company boards. Of course, there is currently nothing to stop companies having board-level employee representatives, but hardly any companies do so. The UK is in a minority amongst EU states in that it does not provide for a legislative system of employee representation. 18 of the 28 EU Member States provide for some form of employee representation on the board, with the vast majority mandating employee representation for certain companies. Employee representation has been advanced on multiple occasions in the UK, with the most notable attempt being the publication of the Bullock Report in 1977. That report recommended a system of board representation in companies with over 2,000 employees. That central recommendation of the report received very little support and the election of a Conservative government in 1979 meant that employee representation fell firmly by the wayside. Attempts to resurrect the issue since have not met with success. It will be interesting to see how Theresa May’s proposal will be received.
- I suspect that binding shareholder votes on remuneration will have little effect. A binding vote was introduced by the Enterprise and Regulatory Reform Act 2013, which introduced a new s 439A into the Companies Act 2006 which provides members of quoted companies with a binding vote on the company’s remuneration policy. This reform has had little impact. It will be interesting to see if Theresa May proposes extending the binding vote to other remuneration issues (e.g. payments for loss of office, golden hellos).
- Oddly enough, the reforms relating to remuneration disclosure right be more useful. Disclosure of pay ratios has been argued for for a long time (see, for example, this report from the High Pay Centre) and it could be argued that media pressure has been a better regulator of remuneration than the general meeting (see, for example, the foregoing of bonuses by Bob Diamond and Stephen Hester following intense media pressure). Moves that place more pay information in the public arena may allow further public pressure to be placed upon excessively paid directors. However, there is a downside. Remuneration disclosures are already significant and the details of a director’s remuneration package can be very complex. Increasing disclosure obligations will, accordingly increase the length and complexity of annual reports (anyone who has read the annual reports of a FTSE company will attest that such reports are already way too long) and will, of course, impose additional costs. Theresa May’s proposals to simplify bonus structures could help this, but we will need to see the details.
Perhaps the most surprising thing about the above proposed reforms is that they are being advanced by a Conservative MP. If one did not know that these proposals were being advanced by Theresa May, one would be forgiven for assuming that they were the proposals of a Labour MP – a number of these proposals have been advanced by Labour MPs or those on the left left of the political spectrum, and were opposed by the Conservatives at the time. Indeed, in some notable respects, Theresa May’s proposals go further. Labour’s 2015 manifesto only pledged to provide for employee representation on remuneration committees, whereas Theresa May appears to favour employee board representation.
The devil will, of course, be in the detail and only time will tell the extent to which these proposals are actually implemented. The extent to which company law reform will be a priority to a Prime Minister who has to negotiate the UK’s exit from the EU remains to be seen. But it is an interesting development to see a Tory Prime Minister designate speaking in such terms.