CMI backs UK government measures to improve corporate governance

07 March 2017 -

Executive pay, purpose and trust, and employee voice have all been put under the microscope

Patrick Woodman

The behaviour of business leaders is back in the spotlight. At large privately owned companies such as BHS and Sports Direct, poor management has seemed endemic. Runaway executive pay at FTSE-listed companies has tested public patience, and even led Labour leader Jeremy Corbyn to talk of a pay cap. Corruption scandals have bedevilled organisations such as Rolls-Royce and Sweett Group. The former City minister Lord Myners has called for legal change to address inadequate corporate leadership.

Back in 2014, CMI’s influential Management 2020 report with the Commission on the Future of Management and Leadership, considered this agenda. As Commission Co-Chair Peter Ayliffe noted at the time, the effect of short term attitudes in business was to create “a ticking time bomb of myopic management”.

Against this backdrop, CMI has welcomed the government’s recent Corporate Governance Reform Green Paper and, in particular, its focus on executive pay and the importance of employee voice. And we welcome Prime Minister Theresa May’s recognition that “business must earn and keep the trust and confidence of their customers, employees and the wider public”.

Here are some of the key points we make in our full response to the green paper:

The CMI view on… executive pay

The latest data from the National Management Salary Survey from XpertHR and CMI indicates a disconnect between performance and pay in many, different UK organisations, and that earnings increases among senior leaders are outstripping those at lower levels. Bonuses remain divorced from performance in too many organisations.

CMI has argued that solutions require adoption of good management practice: clear targets, alignment of bonus criteria with performance, and preparedness to have difficult conversations. The perception that this is not being done successfully across business may explain why 74% of managers surveyed by CMI in December 2016 support the government in taking action to curb runaway executive pay.

CMI therefore supports the government in bringing forward measures to curb excessive and unearned pay – and specifically to strengthen transparency and support Remuneration Committees in achieving these ends.

CMI also broadly welcomes measures to move business towards a longer timeframe for evaluation of senior executive’s performance and pay. Significant businesses are successfully defining their longer-term social purpose and seeking to escape from the tyranny of short-term financial metrics as the only measures of success.

The CMI view on… purpose and trust

In recent weeks, corporate raiders, in the form of Kraft-Heinz and LG Capital, tried to take over one of the crown jewels of UK business, Unilever. It was telling that they were only deterred when chief executive Paul Polman reasserted Unilever’s core, socially driven purpose. Long-term social purpose trumps short-term financial gains, the episode seemed to suggest.

CMI’s Management 2020 report asked more than 2,000 UK leaders and managers about their organisation’s current approach with regard to purpose, and the role it plays in governance. What became clear was that any long-term business strategy should include measurable commitments not just to financial targets but also to the long-term purpose of the organisation.

Too many boards, however, fail to take this broader perspective. This failure is driving an increasing dissatisfaction between middle managers and leadership teams, which was alarmingly illustrated in our 2016 report, The Middle Manager Lifeline: while trust is seen as critical to organisational performance by 85% of middle managers and 88% of senior leaders surveyed, only 36% of Britain’s middle managers said they fully trusted their leaders.

A transparent culture, with clear lines of communication from worker to board, is required to restore trust and belief in effective corporate governance.

The CMI view on…employee voice

When Theresa May became prime minister, she floated the idea of mandatory worker representation on boards. Although the government has now ruled out this approach, it’s notable that, in our 2016 Future Forecast, launched prior to the green paper, 63% of CMI members were strongly or somewhat supportive to the idea.

Despite the government’s move it’s clear that many businesses need to do a much better job of listening to their employees. The government’s focus on corporate governance is much to be welcomed and CMI will be continuing to feed into this agenda.

If you’d like to input on CMI’s position on the government’s proposed corporate governance reforms, please email policy.development@managers.org.uk

Read CMI's full response to the proposed reforms here