A recent Times newspaper column by James Kirkup, titled, 'The overdue change to the law that could save British capitalism', was a good reminder to note down some of my own thoughts on how executive pay could feature in the 'capitalism with purpose' debate.
First though, some company law...
Duty to promote
The Better Business Act (BBA) campaign, link below, wants parliament to update section 172 of the Companies Act 2006 to give it real force of law.
Backers behind the campaign include John Lewis, Iceland foods and the Institute of Directors.
At the same time ReGenerate, a think tank backed by the Department for Digital, Culture, Media and Sport and the Joseph Rowntree Foundation, similarly recommends changing section 172 as part of a wider drive to enshrine "purpose" in corporate life.
Section 172 currently requires directors to "have regard" to the interests of 'stakeholders' such as employees, suppliers, customers, community and the environment.
Here is section 172(1) in full:
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
The problem highlighted by the BBA is the tension at the heart of section 172.
On the one hand, companies have a commercial imperative to maximise profits and create shareholder value. On the other, companies should be mindful of having a social purpose beyond just making money.
Whilst directors may pay heed to the precepts of purposeful capitalism, in practice it is not apparent that directors are able or willing to walk the walk. Shareholder primacy is still the dominant orthodoxy driving most corporate behaviour.
To counter this the proposed changes to section 172 are designed to: "...empower directors to exercise their judgement in weighing up and advancing the interests of all stakeholders" and "...apply to all businesses by default. It must no longer be optional to benefit wider stakeholders beyond shareholders."
Underlining is my emphasis.
'How' not 'what'
The proposed reform is that section 172 would be amended to give shareholders and stakeholders equal consideration in directors' duties. Companies would still be capitalist enterprises but they would have to report on how they were making money for their shareholders whilst looking after society and the environment.
A better type of capitalism?
'Purposeful capitalism', 'responsible capitalism', 'stakeholder capitalism', are all reactions to the same concern.
Evidenced by the 2008 financial crisis, sling shotted by Brexit and magnified by Covid, there has been persistent unease that capitalism is not working as well as it should, or to put it another way, is working very well but only for the few not the many.
Critics maintain that globalisation, wealth inequality, inter-generational fairness, climate change, faceless corporations, populism, etc. have eroded our faith in the ability of companies, institutions, and their leaders to do the right thing by society.
In part, ESG is an attempt to do the right thing, especially the “S” in environmental, social and governance factors.
There is a fascinating debate to be had as to how honest shareholders want companies to be as to their type and level of ESG involvement and what the appropriate balance should be as between profits and purpose
For the moment though ESG is everywhere you look and executive pay is no exception.
Companies are increasingly looking to link corporate performance and therefore executive pay to ESG targets.
The most recent Investment Association's principles of remuneration notes that it may be appropriate for remuneration committees to include ESG considerations when determining policies and outcomes.
If you accept that the future of capitalism should have a social purpose then the debate around executive pay would, at least in part, no longer be about levels of pay.
Instead it would be about incentivising companies to create long-term value for society.
Rather than protesting against executive pay every AGM season institutional investors would have grounds for protesting if not enough societal value had been created.
By extension that might mean companies and their remuneration committees escaping criticism if executives were rewarded for creating that value.
If value has been created for the greater good why begrudge someone their £1m bonus?
Everyone's a winner, right?
The problem as always is measuring the value created. The effects of pay depend upon their structures, which as we have seen time and again, are imperfect.
And as I mentioned earlier there is always that tug-o-war between profits and purpose.
But what is interesting about the profits v purpose debate is that it shines a light on outcomes over and above the needs of shareholders.
And in a future world of measuring what purposefully matters, delivering better pay outcomes is no bad thing - for executives, shareholders and ultimately for us.
We can do better than this. Our mission is to change UK law to make sure every single company in the UK, whether big or small, aligns the interests of their shareholders with those of wider society and the environment. Our objective is to amend Section 172 of the Companies Act in line with these principles.