New executive pay transparency measures come into force

Pay ratio regulations will apply to large UK listed companies with over 250 employees and the first statutory disclosures will be provided from the start of 2020. Disclosures will make companies justify their pay for top bosses and account for how those salaries relate to wider employee pay.

New regulations coming into force today (Tuesday 1 January 2019) mean that, for the first time, the UK’s biggest companies will have to disclose and explain every year their top bosses pay and the gap between that and their average worker.

The pay ratio regulations will make it a statutory requirement for UK listed companies with more than 250 employees to disclose annually the ratio of their CEO’s pay to the median, lower quartile and upper quartile pay of their UK employees. Companies will start reporting this in 2020 (covering CEOand employee pay awarded in 2019).

In addition to the reporting of pay ratios, the new laws also require all large companies to report on how their directors take employee and other stakeholder interests into account and require large private companies to report on their corporate governance arrangements.

These reforms are part of the government’s action to upgrade our leading corporate governance and business environment to ensure the UK remains a world leading place to work, invest and grow a business. Reforms follow support and calls from investors and shareholders for companies to do more to explain how pay in the boardroom aligns with wider company pay and reward. The pay ratios regulations will hold Britain’s largest businesses to account for excessive salaries, while recent changes to the corporate governance code give employees a greater voice in the boardroom.

Business Secretary Greg Clark said:

Britain has a well-deserved reputation as one of the most dependable and best places in the world to work, invest and do business and the vast majority of our biggest companies act responsibly, with good business practices.

We do however understand the frustration of workers and shareholders when executive pay is out of step with performance and their concerns are not heard.

The regulations coming into force today will build on our reputation by increasing transparency and boosting accountability at the highest level – giving workers a stronger dialogue and voice in the boardroom and ensuring businesses are accountable for their executive pay.

These new regulations are a key part of the wider package of corporate governance upgrades we are bringing forward as a government to help build a stronger, fairer economy that works for businesses and workers.

Alongside the pay ratio reporting will be a new statutory duty on companies to set out the impact of share price growth on executive pay outcomes. This will provide greater clarity and for shareholders about the impact that significant share price growth can have on executive pay outcomes and whether discretion has been exercised before pay awards are finalised.

The corporate governance upgrades introduced by the government form an essential part of the UK’s modern Industrial Strategy – a long term plan to build a Britain fit for the future through a stronger, fairer economy.

Decision Blockers

Bad habits that stop you from making good decisions

The primary role of a board of directors is to make decisions.

There is a wide range of decision-making processes that you should require your executives to apply before they submit recommendations to the board.

Nonetheless, boards will often be forced to make decisions with flawed or incomplete information. In addition, there are some bad habits that will stop boards from making the best decision within the constraints of information available at the time

It is important to be aware of these and to build good practice into board processes.

Groupthink

Groupthink arises when the desire for consensus overrides realistic appraisal of alternative courses of action; it is the result of a culture that prevents contradictory views from being expressed and subsequently evaluated.

Look out for groupthink on boards with similar backgrounds, norms and values and/or a history of making similar decisions.

Directors are, almost without exception, intelligent, accomplished and comfortable with power. But you put them into a group that discourages dissent, they nearly always start to conform, and the ones that don’t often decide to leave.

Head hunters looking for potential directors, and appointment committees will often ask, “Is this fellow a team player?” which is code for “Is this person compliant, or does he make trouble?”.

To avoid groupthink, start by recognising the value of independent-thinking independent directors; appoint them and encouraging challenge at board meetings. Ensure that it is standard practice to ask ‘Devil’s Advocate’ questions before each decision is made.

Wilful blindness

In the 2006 case of the US Government vs. Enron, the presiding judge instructed the jurors to take account of the concept of ‘wilful blindness’ as they reached their verdict about whether the chief executives of the disgraced energy corporation were guilty.

It was not enough for the defendants to say that they did not know what was going on; that they had not seen anything. If they failed to observe the corruption which was unfolding before their very eyes, not knowing was no defence.

The guilty verdict sent shivers down the spine of the corporate world.

Extreme examples might also be the tobacco industry and climate change deniers.

On a smaller scale, what might be some of the things that you might be subconsciously avoiding? For example, the impact of new technology, changes in the market or bad practice in the workplace. Think of the #MeToo movement.

Again, introduce the practice of asking “What might we be avoiding; what is it we don’t want to admit?”

Blind spots

Blind spots are slightly different. A blind spot is something that you seem unable to understand or to see how important it is. For example, a board might be completely ignorant of strategically important issues or of problems caused by outdated assumptions and interpretations. It might arise from prejudice or outdated thinking, but it is not an act of avoidance.

Bind spots can be avoided by ensuing that directors and boards are exposed to new thinking and developments; wide reading, attending conferences and presentations from experts.

Ask “What might we be unaware of or failing to see?”

Confirmation bias

Confirmation bias arises from the influence of desire on beliefs. It is the tendency to search for, favour and recall information in a way that confirms your pre-existing beliefs or hypotheses.

When people would like a certain idea/concept to be true, they stop gathering information when the evidence gathered so far confirms the views what they want to believe. Once they have formed a view, they embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it.

It should be good practice to include a Devil’s Advocate session before any decision is made. “What evidence could we find in order to prove the opposite?”

Anchoring bias

Anchoring bias is a result of jumping to conclusions, of being influenced by the first idea presented, being impressed with the idea and basing your decision on that rather than considering all the other information.

For group decision making, it is crucial to obtain information from each member in a way that they are independent.

Once again, the challenge is to be aware of the danger of anchoring bias and to include a process to ensure each idea is examined on its merits.

Overconfidence bias

Overconfidence can cause directors and boards to place too much faith in themselves and their knowledge and viewpoints, and allowing this to get in the way of collecting and considering independent information.

Overconfidence can lead to taking unnecessary risks.

Conclusion: Be aware and be vigilant

Each of these habits is a form of laziness, leading to sloppy decision making. By being aware of them and introducing specific ‘stop and check’ processes, boards can ensure they address issues competently and professionally so that they can be confident of making the best decision within the constraints of information available at the time.

It is useful to review decisions later. “How did we make the decision? Did we take account of all the information and advice available at the time? What can we learn from how events actually worked out?”

 

The Wates Corporate Governance Principles

As 2018 comes to an end, the FRC publishes the finalised Wates Corporate Governance Principles for Large Private Companies. The last piece in a series of major changes to UK corporate governance that will come into effect from 1 January 2019.

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What do you think of this critique of corporate governance?

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Mark Zuckerberg performance challenged in Business Insider article

Source Business Insider UK.

  • 83% of independent Facebook investors believe Mark Zuckerberg should be fired as chairman of the board.
  • It is extremely rare for a majority of common stockholders to vote against their own CEO with such a massive majority.
  • The shareholders’ problem is that Zuckerberg has a history of making mistakes.
  • The cost of Zuckerberg’s errors in judgment run into the billions. In one morning back in March, $30 billion was wiped from the value of the stock over an incident that Zuckerberg later took responsibility for.
  • Texts between Zuckerberg and board member Marc Andreessen show that at least one other Facebook director thinks Zuckerberg’s control of the stock is “the straw that breaks the camel’s back on the optics of good governance.”
  • It’s weird that a company that is systemically important to the internet is so dependent on a single point of failure: Zuckerberg.

Mark Zuckerberg is the founder, CEO, and chairman of the board at Facebook. He also controls a majority of the company’s voting stock. His power at the company is complete. He cannot be fired or disciplined. If the directors on his board attempted to remove him, he could simply vote with his stock to replace them with friendlier ones. It is unlikely the current directors would do that because they are each paid at least $350,000 a year, except for the ones who are also Zuckerberg’s company employees — they are paid many millions more.

Zuckerberg has much more power than ordinary CEOs at publicly traded companies, many of whom are held accountable by independent board chairmen and directors appointed at the behest of investors. On paper, everything ought to be going his way.

And yet Zuckerberg is at war with his own shareholders. As Business Insider’s Jake Kanter reported last week, 83% of independent investors — those stockholders who are not Zuckerberg himself or his managing executives — believe he should be fired as chairman of the board.

That’s an astonishing majority against him, given the stock’s performance. By any measure, Zuckerberg has delivered as CEO. His product is used by 2 billion people. The stock has risen from an IPO price of  $38 in 2012 to $195 today — a staggering return.

Yet his own investors think he needs to be reined in.

Zuckerberg’s critics should be taken seriously

It is extremely rare for a majority of common stockholders to vote against their own CEO with such a massive majority. Even in the fiercest of proxy fights, activist investors find it difficult to muster more than 20% or 30% of a company’s stock. (Shareholders suffer from extreme inertia — it’s easier to sell the stock than it is to wage war against a board.) If, at an annual general meeting, the company wins a vote by a margin of less than 90%, it is generally regarded as a sign of significant unrest.

So Zuck’s critics should be taken seriously.

The shareholders’ problem is that Zuckerberg has a history of making mistakes, which he himself admits.

He initially did not think that Russian interference in Western elections via Facebook was a big deal. He also took responsibility for not following up quickly enough on the Cambridge Analytica crisis. “We didn’t take a broad enough view of what our responsibility is, and that was a huge mistake. It was my mistake,” he said.

Way back in the beginning, Zuckerberg made the mistake of being cavalier about his users’ privacy. As a 19-year-old Harvard freshman who founded Facebook in his dorm room — an origin story Zuckerberg still references when he speaks in public today — he sent a string of texts to a friend describing how much data he had access to. “People just submitted it,” Zuckerberg told his friend. “I don’t know why. They ‘trust me’. Dumb fucks.”

Facebook, with Google, has a duopoly over the internet

Who among us has not said something stupid as a teenage student? We can forgive him for that.

Zuckerberg is a different person today. He is a corporate titan whose firm vacuums up half of all new advertising dollars being spent on the web. Facebook, with Google, is a de facto duopoly over the internet. The pair capture 71% of all digital ad spending in Europe, according to analyst Brian Weiser at Pivotal Research.

And that is precisely why Zuckerberg’s unchecked power is so dangerous. In March, Facebook stock slipped 6%, wiping $30 billion off the value of the company, on the Cambridge Analytica news. That was just one morning’s trading.

The cost of Zuckerberg’s errors in judgment thus run into the billions.

Yet Facebook, which is systemically important to the internet, remains tightly attached to a single point of failure: Mark Zuckerberg.

At other companies, the founder, ceo and chairman are three different people. If one gets something wrong, there are two others to act as backup.

Leaked texts from the board say: “He’s worried that it’s the straw that breaks the camel’s back on the optics of good governance”

Even Zuckerberg’s own board members are aware that this is a problem. In December 2016, some texts between Zuckerberg and Marc Andreessen, the Netscape cofounder turned Silicon Valley investor who runs the venture-capital fund Andreessen Horowitz, surfaced in a shareholder lawsuit.

The suit alleged that Erskine Bowles, one of Facebook’s board members, was “worried that one of the concessions Zuckerberg wanted — to allow the billionaire to serve two years in government without losing control of Facebook — would look particularly irresponsible.” (Zuckerberg wanted the option to leave the company and go into politics without giving up control.) Andreessen texted Zuckerberg that the “biggest issue” was “how to define the gov’t service thing without freaking out shareholders that you are losing commitment.”

“Erskine is just massively uncomfortable with you getting to low economic ownership and then going off on leave with no involvement by the board and retaining control,” Andreessen, who is also a board member, said.

“We rediscuss it on every call … I’m going to try to drag it over the line one more time. ☺ … He’s worried that it’s the straw that breaks the camel’s back on the optics of good governance.”

Facebook’s independent investors — a majority of all investors — believe the company’s corporate governance is wrong. And at least one of Zuckerberg’s own board members thinks Zuckerberg has gone too far, in the past, in his desire for control.

It is not clear what the independent shareholders can do to force more accountability inside Facebook’s corporate governance structure.

But it is clear that it is needed.

Wates Corporate Governance Principles

The Financial Reporting Council (FRC) has published a consultation on corporate governance for large private companies.

Chaired by James Wates, chairman of The Wates Group, the Wates Corporate Governance Principles consultation document encourages large private companies to follow six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis:

  • Purpose – An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
  • Composition – Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
  • Responsibilities – A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.
  • Opportunity and Risk – A board should promote the long-term success of the company by identifying opportunities to create and preserve value and establish oversight for the identification and mitigation of risk.
  • Remuneration – A board should promote executive remuneration structures aligned to sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
  • Stakeholders – A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good relationships based on the company’s purpose.

James Wates commented, “These principles will provide a flexible tool for companies of all sizes, not just those captured by the new legislative reporting requirement, to understand good practice in corporate governance and, crucially, adopt that good practice widely. The principles are about fundamental aspects of business leadership and performance.

The consultation is open until 7 September 2018.

 

New QCA Corporate Governance Code provides the answer for AIM companies adjusting to new rules

TheQuoted Companies Alliance has revised their QCA Corporate Governance Code for small and mid-size quoted companies in the UK.

The QCA Code includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to apply these principles effectively. It has been put together by the QCA’s Corporate Governance Expert Group and a standalone Working Group comprising leading individuals from across the small & mid-size quoted company ecosystem.

The revision of the QCA Code is especially timely and relevant. London Stock Exchange has recently announced a change in the AIM rules so that all AIM companies will be required to apply a recognised corporate governance code and explain how they do so from September 2018.

QCA research indicates that currently over half of the 900+ companies on AIM refer to the QCA Code. There is also a significant minority of AIM companies that currently do not apply any code.

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Why workers’ votes promote good corporate governance

A consensus is emerging that votes at work promote good corporate governance, argues Ewan McGaughey. Here he outlines behavioural, qualitative and quantitative evidence, and explains that votes at work in Britain have among the longest, richest histories in the world.

The UK is about to stop shareholders monopolising votes for company boards, with worker voice. Currently, asset managers control most shareholder votes in public companies. They have systemic conflicts of interest, because shareholder votes can influence companies to buy asset managers’ financial products (e.g. defined contribution pensions). But now this is changing. One small step, following government consultation, is that the Financial Reporting Council will write new ‘comply or explain’ rules in the UK Corporate Governance Code, so that listed companies introduce: (1) ‘a designated non-executive director’ responsible for employee engagement, (2) ‘a formal employee advisory council’ or (3) ‘a director from the workforce’.

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Corporate governance reporting – major change is on the way

The 2017 Building Public Trust Award for Corporate Governance Reporting showed there is some very good governance reporting in the FTSE 350, but it also confirmed that there is a relatively small group of companies that are consistently ahead of the pack – and not all of them FTSE 100 companies, it should be noted. However, there are still too many very similar looking governance reports where much of the content could apply to any company.

What the really good reporters have been doing for a number of years is to shift the focus of their reporting away from just describing the governance processes and procedures. Instead their priority is to show how those processes and procedures have been applied. So, for instance, if there has been a major corporate development in the year – like M&A activity or changes to strategy – the governance report gives an insight into how the board and its committees were involved. Good ways to do this include case studies or the chair’s introduction to the governance report. The governance process can also be discussed alongside the disclosures of the event itself, with appropriate cross-referencing from the governance report. The key is to show what outcomes were achieved through the governance processes and, therefore, what value they added.

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