Populist UK Governance Changes For Australia? No Worries (for now)

On her elevation to leader of the UK Tory party, Therese May shocked UK business leaders by saying that, among other things, her government will improve corporate governance by:

  • bringing forward proposals for representatives of both consumers and workers to hold Board positions
  • requiring annual binding votes on remuneration policy and implementation, replacing the current regime of having an annual advisory implementation report vote and a 3-year binding policy vote, and
  • disclosure of the ratio between the CEO’s pay and the average worker’s pay.

In announcing these initiatives, Mrs May observed that NEDs are “drawn from the same, narrow social and professional circles as the executive team” and, “the scrutiny they provide is just not good enough.”

Could similar changes find their way to Australia?

Many governance initiatives originate out of the UK, with modern day remuneration governance stemming (as our senior people in the firm recall) from a plethora of UK inquiries in the mid 1990s. Examples that were adopted in various forms by Australia (and other countries) include:

  • the formation of independent board remuneration committees,
  • more comprehensive executive pay disclosure,
  • shareholder “say on pay”,
  • “comply or explain” codes of practice, (these stemming from the Cadbury Report – see HERE and Higgs report – see HERE); and
  • the ubiquitous application of relative TSR as an LTI performance measure (suggested by the Greenbury report – see HERE).

However, recent experience suggests that not all UK initiatives find their way to Australia. While longer LTI vesting periods have been adopted the larger ASX listed companies, the binding “say on pay” forward looking policy vote has not.

Rather, during the fallout from the GFC and the subsequent Productivity Commission inquiry into executive pay, Australia followed a different path with the ”two strikes” law (see HERE).

For all its faults (and there are several), most investors and directors would agree that the “two strikes’ law is a better remuneration governance method than the UK’s inflexible process.

Nevertheless, it is worth considering if Theresa May’s initiatives have much of a chance of making their way to Australia. For this, one must consider the circumstances leading to her announcements.

Objectively, it should not have been UK executive pay practices. Among the FTSE 200 there were about 12 companies that appear to have questionable executive pay. While they received considerable public condemnation, the rest were well behaved, with almost a majority of CEOs receiving little or no fixed remuneration adjustments or STI payments, and the median overall remuneration movement of less than 3%. In effect, UK pay trends are not dissimilar to Australia’s executive remuneration changes (see HERE).

So if market practice was the impetus for the new Prime Minister’s pronouncements, Australia could be in trouble. But it was more than this.

There is no doubt Theresa May resorted to populism in positioning her party for re-election. Her moves appeals to the very significant swathe of UK voters who feel disenfranchised, blaming their predicament on political and business elites. With no real increases in income for almost a decade, UK voters have a right to be unhappy and direct their ire at those they feel are responsible. Hence, the UK centre right has taken one more step to the left by ganging-up with the disenfranchised against the business elite and their pay.

The conditions in Australia, at this stage, are not the same as those in the UK that have led to Theresa May’s populist targeting of the business elite. There has been no overall decline in Australian average or median incomes. Importantly, and unlike in the US and UK, income redistribution since the GFC has been biased to the lower income quintiles (see the Reserve Bank’s analysis HERE).

Consistent with most of the country’s history, the distribution of Australian wealth and equality of opportunity remains relatively good (See HERE for a prior discussion of CEO:worker pay ratios and country equality).

The Australian economy, despite naysayers, continues to outperform most western countries, as it has for over the last 25 years, with no recession. While executive remuneration in Australia will always attract critics, and political populism has yet again taken on its favourite targets of banks and immigration, there does not seem to be enough of both the fodder and electoral angst for legislative sledge hammers to have a crack at Australia’s executive pay walnut.

© Guerdon Associates 2024
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