British businesses must crack down on excessive pay for bosses and improve boardroom diversity to restore public trust after scandals at Sports Direct and collapsed retailer BHS, MPs have warned.
Among their wide-ranging recommendations, the MPs’ committee called for a ban on long-term investment plans, complex multi-year pay deals that have been criticised for masking the true extent of huge awards to executives and for encouraging short-term thinking.
Responding to the gulf in pay that has emerged between bosses and average workers, MPs on the business, energy and industrial strategy select committee also called on firms to publish pay ratios between top executives and other employees and to put workers on remuneration committees. The MPs urged the government to grant the corporate governance watchdog more powers to hold company directors to account.
“The UK corporate governance system is recognised throughout the world as of high quality. However, recent scandals and the issue of executive pay have undermined public trust in corporate culture,” said the committee’s chair, Labour MP Iain Wright.
“That, together with rising stakeholder expectations, changing business models and technology, means that corporate governance needs to evolve to provide assurance to investors and wider society.”
The committee highlighted revelations that workers at Sports Direct were being paid less than the legal minimum wage and the demise of BHS, which cost 11,000 jobs and prompted MPs to declare that the retailer had been subject to “systematic plunder” by former owners Sir Philip Green, Dominic Chappell and their respective “hangers-on”.
Wednesday’s report linked those scandals to “serious failings in corporate governance” and told companies to take action to repair the damage. It also urged them to curb executive pay, which has ballooned in recent years while most other workers have seen little growth in their wages.
The report comes amid warnings to Britain’s biggest companies that they face a wave of revolts this annual meeting season and risk a government clampdown on excessive remuneration unless they show restraint over executive pay.
The committee of MPs used its report to call on businesses to simplify the structure of executive pay and scrap LTIPs. “No new LTIPs should be agreed from the start of 2018 and existing agreements should not be renewed,” the report concluded.
It said that gathering evidence for the report, MPs were told by one witness “pay was now so complex that executives themselves do not always understand their own remuneration”. It also heard LTIPs could distort executive behaviour, with chief executives tailoring decisions to affect the share price around the time their shares were due to vest.
Wright, whose committee last year accused billionaire Mike Ashley of running Sports Direct like a Victorian workhouse, said successful companies could not be disconnected from society.
The MPs’ new report recommended companies establish stakeholder advisory panels, including workers, consumers, and suppliers. It also suggested workers be represented on remuneration committees and for the chairs of those committees to be expected to resign if fewer than 75% of shareholders fail to approve the company’s pay policy. But it stopped short of demanding a worker representatives on boards – something proposed and then watered down by Theresa May last year.
On gender diversity, the committee urged the government to set a target for the number of new senior appointments going to women and it backed a recommendation on improving ethnic diversity on boards made in the government-commissioned Parker report last year.
The report also called for a new and stronger voluntary code of governance for private firms.
“The collapse of BHS highlighted the flaws in damage which private companies can do,” said Wright.
The Institute of Directors said that call reflected its own longstanding concerns about the lack of transparency in the governance of unlisted firms.
“A code for private companies is supported by two-thirds of IoD members and should be established for the largest firms,” said IoD director general Stephen Martin.
The committee also recommended that the government give additional powers to the Financial Reporting Council, which polices the corporate governance codes for listed companies. The watchdog should be able to publicly report on any failings of a board or its individual members. “If companies fail to engage with the FRC, the committee recommends the FRC be given authority to initiate legal action,” said the MPs’ report.
The TUC welcomed that and other recommendations. “British people are fed up with the bad behaviour of big business. Workers are getting a raw deal, and our economy is harmed by short-term thinking in the board room. Reform is badly needed, and the government should take up many of the excellent ideas in this report,” said the TUC general secretary, Frances O’Grady.
Stefan Stern, the director of the High Pay Centre, welcomed the report, including the committee’s demand that companies publish pay ratios between the chief executive and both senior executives and all UK employees.
“The government should reflect on the powerful case for reform made in this excellent report, and act on it,” he said.