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New PM spells big change for boards

A piece by Stefan Stern in the Financial Times on 21.7.2016

It could be a long, hot summer in the boardroom. Not because of economic or political uncertainty: that is a “known unknown”, for which some preparation can be made. No, the reason boards will come under pressure is that the apple cart of corporate governance has just been turned upside down by the new prime minister of the UK.

In a campaign speech made only hours before succeeding to the Conservative party leadership, Theresa May set out some challenging ambitions. She assessed the current state of governance in FTSE boardrooms, and found it wanting.

“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,” she said.

“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.”

Top pay was also in her sights. “There is an irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses,” she added. “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.”

This is big stuff. It is, in truth, a stunning rebuke to the process of corporate governance reform seen in the UK over the past two decades. The new prime minister has said out loud what others have mumbled only in private: our current system is not working and has to be radically reformed.

There will be pushback, of course. But others are speaking up on the need for change. Tom Gosling, a partner at PwC, says that if those involved in setting top pay do not improve the system soon, “the matter will be taken out of our hands”.

There is a new chief executive in charge of the UK’s Conservative government, and she appears to mean business.

Big changes are coming and boards have to get ready. Paradoxically, this is no time to be a conservative.

Posted on 22 July 2016

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