Businesses should take steps to end the problem of 'ownerless corporations' and further control executive pay, according to a paper by Chris Philp, Conservative MP for Croydon South and member of the Treasury Select Committee.
Restoring Responsible Ownership; Ending The Ownerless Corporation And Controlling Executive Pay calls for the introduction of mandatory pay ratios, along with measures to re-empower shareholders and make boards more accountable.
The paper warns that shareholdings have become highly fragmented and fund managers are often too focused on the short term. This means shareholders fail to exercise proper oversight of the companies they own, which renders the firms "ownerless".
Philp argues that without control and accountability of shareholders, executive and non-executive management could run corporations in their own interests and not those of shareholders and other stakeholders. He suggests this is escalating high executive pay and over-ambitious expansion and takeover plans.
Philp told HR magazine that the high pay offered to CEOs may not be justifiable in many cases. “High corporate pay doesn’t correlate with improved business performance,” he said. “There is actually a negative correlation; which means the higher they are paid the worse the performance is.”
The report suggests that companies try to increase shareholder control of pay awards by establishing a Shareholder Committee consisting of the organisation’s top five shareholders. They should be responsible for an annual binding vote on pay awards, he said.
“Shareholders should be involved custodians of companies,” Philp said. “They should be more involved in company compensation.”
Neil Woodford, whose firm Woodford Investment Management recently announced it would no longer offer bonuses as part of its pay structure, said the recommendations would help businesses adopt a longer-term view.
"I believe that the initiatives in this paper represent important steps towards cultivating a more appropriate and valuable form of corporate governance in the UK,” he said. “By adopting some of the best practices already in existence around Europe we can help boards become more accountable for their long-term performance with, I believe, meaningful benefits flowing to shareholders and the broader UK economy."
