It is undeniable that there are serious flaws in the way directors in our biggest companies are paid. Reform is needed and few would argue with Vince Cable’s diagnosis applied to certain high profile cases. To that extent, it is welcomed.
As a general set of reforms, however, it is unsatisfactory in a number of respects. Most clearly, it has ducked the issue of whether particular pay settlements should be subject to shareholder vote. Only the policy vote is binding (not particular cases of implementation) so questions of whether or not payments are consistent with the policy are likely to be hotly contested and difficult to settle. It is not clear that these reforms would have prevented recent cases of boardroom excess.
In addition, it is not clear that the problems evident in certain very large listed companies occur equally in many smaller businesses (where the gap between shareholders and executives that has been exploited in larger companies is less pronounced). It is hoped that the detail of the new reforms will not impose greater regulatory and compliance burdens on companies, many of which will not suffer from the faults Cable is attempting to address.
This approach also fails to address the question of why these faults arose in large companies. The greatest improvements in corporate governance could be obtained by addressing issues of poorly engaged shareholders and weak boards of directors (and particularly non-executives) to encourage companies to take the ‘longer-term view’ that Cable correctly identifies as key to economic growth. These are the changes that are needed and it is unclear whether these reforms will be effective in bringing this about.