The deliver long-term success (ICAEW)1. The majority, if not,

The purpose of corporate governance is to act as a system that controls and directs companies, to deliver long-term success (ICAEW)1. The majority, if not, all of these companies have a board of director that holds the responsibility for corporate governance. A crucial element is to ensure that the interest of shareholders is protected where they are unaligned with the interest of the directors running the company. The concept of what good corporate governance is and what it entails differs across the globe, especially in regards to different cultures. The UK has specifically been regarded as a world leader in corporate governance. It is known worldwide for being an appealing place for business and investors, providing them with the confidence that their company will be well run. 2017 has been a year of major change for the UK, from the change in the prime minister, increase in interest rates and the preparation for Brexit. All of these major changes have an effect on organisations and investors, thus implicating the way they operate and the types of investments taken on. As a result of these changes, in 2016 the British government reformed the corporate governance framework. This essay will outline the three proposals from the Corporate Governance Reform and discuss if these proposals are the best options.One of the issues that the government has decided to work on is the problem of executive pay. Executive pay has risen sharply from the 1970’s till now, especially when compared with other wages as such wages have remained fairly static. According to the FTSE 100 CEO’s, there’s an average annual pay package of £4.5m, as of 2016, in comparison to the average annual salary for UK full-time workers at £28,0002. This means that the average UK full-time employee would need to work for 160 years in order to earn what these CEO’s are paid in just one year, which in theory they would never earn. The question stems from the very bases that the day to day employees are the ones who put in the most effort to ensure mundane tasks are completed. If this is the case, why are CEO’s getting paid so much for doing so little? How does the remuneration committee come to their decisions on how much these executives are paid? There have been many proposals that the government has considered combatting these questions and there are also many theories that both support and are against the interference of the government and I will begin by outlining one of these proposals.One of the problems identified is that there is a lack of consideration of shareholders and employees whilst developing pay policies (CGR Page 12). It is granted that it is fairly difficult for the remuneration committee to implement the interests of all stakeholders, however, this is not a good enough reason to ignore the concerns of the investor community. Therefore, one way to tackle this problem would be to expand the remuneration committee in several ways such as appointing an employee as a representative of the committee. This is a good option as the purpose of this is to engage all stakeholders in the process of deciding executive pay for the next year, thus increasing the transparency of the board and employee morale. It may not cause executives’ salaries to be cut, but in the long-run, it will cause the birth in an array of bold workers who will be willing to demand a higher pay, which the economy would benefit from (FT 2017)3. There has been an increasing demand for this intervention as over half of the individuals who responded to the green paper identified the need for such improvements. Likewise, the stakeholder theory solidifies this action as it identifies there to be a rising inequality reflected in communities. These corporations generate a significant amount of revenue and are being spent in the wrong way. Rather than executives earning so much money for doing largely unearned work, this could be reflected in cheaper prices or better yet an increase in dividends for shareholders. David Harvey states that the modern world Is dominated by corporations and those people have created their own class; they work together to protect their own interest (Lecture 8). Hence why the government involvement is positive as it increases the transparency at all levels so that the power of executives is diminished in a way that the pay ratio would be known and understood by all members, reducing the ability for executives to be paid beyond an acceptable level. However, according to the Agency theory, it has been argued that executives receive the highest pay because they do the most to benefit the principle; the shareholders. This means that there is no agency problem. Jensen states that in fact the governments’ interference is the problem in itself and markets already work (Lecture 8). Therefore, the government doesn’t need to take on measures to consider shareholders and employees when developing new pay policies as it doesn’t have anything to do with them as their roles are not comparable. As long as the amount that executives receive is linear to shareholder wealth, then the actual amount shouldn’t matter and so there is no need for a narrative to be available to all. Another proposal by the government is that companies should be required to release their pay ratio (CGR PAGE 14). Pay ratio is the way by which wealth is dispersed and measured in a company. It is done by measuring the wages of both the highest and lowest paid workers within a business. Likewise, the pay ratios act as a new tool and incentive for companies to explain their overall approach on how they pay their CEO’s and average employees whilst addressing the lack of knowledge on the dispersion of pay amongst stakeholders. Therefore, the pay ratios should be both explainable and justifiable. The release of pay ratios will ensure that all stakeholders are aware of the authority that directors possess and how/if they abuse their strengths, allowing room for greater transparency between the agent and principles; combating the problems of information asymmetry. It will also enable there to be an increase in the spread of reward throughout the company, rather than the distribution remaining at the top of the hierarchy. There has been a growing need for the release of pay ratios now more than ever, given that shareholders have less power to influence pay-outs to investors. If stakeholders were able to clearly see the inequality in pay ratios, they would go out of their way to ensure that their opinions are taken into consideration in meetings, thus influencing how executives are paid (BBC 20174). However, the increase in the transparency of pay ratios to stakeholders poses significant negative consequences. For example, employees may be misled by the information they are given and adopt a one-glove-fits-all approach when it comes to understanding the spread of wealth for all firms. In this instance, stakeholders are under the wrong impression of what is normal for their firm. The way that various directors calculate their pay ratios is subjective and may rely on a series of quantitative and qualitative information such as the skills set of the workers or even the age and gender of the workers. Therefore, the comparison between the wages of the average worker and a CEO is a waste of time and is somewhat meaningless as it doesn’t take all factors such as the demography of the company into consideration. The technology field, for example, consists of many highly skilled workers and company founders and so the pay ratio would be significantly lower than that of the Retail sector. This is because within the retail sector there is a large number of unskilled workers who receive minimum salaries and when comparing the average salary with that of a CEO, there is a higher pay ratio (Forbes, 2017)5. Similarly, it still poses that question as to how releasing the pay ratio is relevant and if it really combats what it aims to do. Some may argue that the release of pay ratio acts as an opium for all stakeholders. It gives stakeholders the ability to voice out any opinions that that may have in regards to the distribution of wealth, however, there isn’t anything that will be done as the CEO’s at the top have formed a class of their own. Though, the misleading potential of pay ratios has been combatted by the inclusion of a secondary legislation, a narrative on the pay ratio (CGR Action 3). This is a valuable initiative to take on board as it will lead to a greater sense of cohesion and greater transparency amongst the board of directors and all stakeholders, as the ratio will compare the average UK employee wage to that of the CEO’s pay. The narrative provides the rationale/explanation for the distribution of wealth within an organisation, minimising the instance of stakeholders misinterpreting the information given whilst increasing their trust for their firm. It also allows various firms to have evidence when asked by the government or any governing bodies as to why their ratios are higher or lower than those within the same/similar markets. Still, on the matter of executive pay, the government has also proposed that there should be changes in the long-term-incentive-plans (LTIP) in order for it to be aligned with the long-term interests of shareholders (CGR Action 6). An LTIP is designed to be a reward system that improves employee performance in the long term. Employees are typically set a performance target and rewarded shares at zero cost, depending on the extent that each target has been met. Generally, the main purpose of LTIP’s are to provide a link between long-term company performance and executive pay, but this has not always been the case. The green paper outlines that LTIP’s have become ‘increasingly complex’; and that its performance targets do not align executive remuneration to the long-term performance of the company.