After her sole remaining opponent in the Conservative leadership race stood aside this afternoon, Theresa May looks set to move into Downing Street within days – and she’s got big plans for big business. Fans of the status quo, look away now.
In an article for the Times this morning, May expressed discontent with the current model of corporate governance used by FTSE companies and in particular the effectiveness of supposedly independent non-executive directors. ‘In practice, they are often drawn from the same narrow social and professional circles as the executive team and the scrutiny they provide is often limited,’ she said. So, she suggests, workers and even consumers should be given a seat at the table
That’s a pretty radical idea from a steady-handed right-of-centre Conservative. Having worker representation on the board isn’t unheard of, though. In fact in Germany it’s the norm. But giving consumers a more direct say in the workings of a business is very unusual and it remains to be seen how that would work.
How it works in Germany
The German model of corporate governance is very different to that in the UK and US. There are two boards. The management board is comprised of the most senior company executives, including the CEO. That’s held accountable by the supervisory board, which is made up entirely of independent directors and workers’ representatives – a system known as codetermination (here’s Volkswagen’s board by way of example).
There are definite advantages to this model. Some suggest the German governance system is one reason why that country's companies take a longer-term approach than Britain's. And giving employees a more direct say could help resolve boss-worker disputes more amicably, giving staff a sense of ownership and consequently improving productivity.
But there are downsides too. Going back to VW, some have suggested that having workers reps can distort management priorities – ‘The fact that huge bonuses have been approved by the labour-dominated supervisory board suggests the old executive management team knew they would be paid a lot of money simply for protecting jobs and increasing wages,’ wrote hedge fund manager Chris Hohn.
More layers of people to seek approval from slows down decision-making, which could be fatal in this age of constant disruption. Codetermination makes a lot more sense for manufacturing businesses, which have to shell out large amounts on long-term capital commitments, than for service businesses, which are more under pressure to be adaptable to the market. Switching to that model could help Britain's manufacturers but it could also damage the country's service sector, which makes up around four fifths of the economy.
What about pay?
No criticism of contemporary corporate culture would be complete without a jab at executive pay. May wrote she wants to tackle the ‘unhealthy and growing gap between what these companies pay their workers and what they pay their bosses.’ Specifically she wants to make shareholder votes on corporate pay packages binding instead of advisory and ‘simplify the way bonuses are paid so that the bosses’ incentives are better aligned with the long-term interests of the company.’
Now that the contest is all but over, May could be PM by the end of the week (if not the end of the day). We won't have to wait long to see how high corporate governance reform really is on her agenda.
Picture credit: Department for International Development (Flickr)