Q2 of 2020ZA: “The best strategy for improving the

management of large public companies is to ensure that such

companies have diverse boards with a mix of executive and
nonexecutive directors, whose pay reflects the performance
of the company. Unfortunately, UK company law ensures
none of these things.”
The above statement can be viewed as partially correct as
undoubtedly having a diverse board with a combination
executive and non-executive directors (NED’s) can be prolific
for the management of any company, as board of directors
guises as one of the pillars of a robust corporate governance
framework as evinced by Organization for Economic Co-
operation and Development who cited 'the corporate
governance framework should ensure the strategic guidance of
the company, the effective monitoring of management by the
board, and the board’s accountability to the company and the
shareholders'. This automatically creates a link to other
fundamental principles of corporate governance like
responsibility, judgement and accountability. However, we
cannot conclusively say that English law governing companies
has completely failed as several reforms were introduced. The
following essay shall critically assess, outline and create the
timeline from the chain of events that raised the issue of
remuneration and diversity, the reforms that were introduced
and weigh their credibility.
The 19th century can be touted as age of revolution for before
this the global landscape was mostly unincorporated business
associations, that allowed individuals to be sole proprietor of
the business, this however was reformed in 19 th and 20th
century when a new corporate model was introduced that
came through by the virtue of Salomon case which dictated a
company to be a separate legal entity having the power to sue
or even be sued and at the same time obtained benefit of
limited liability. With the expansion of the business world, the
problems started to swell in relation to corporate governance,
this was detailed by the Cadbury Committee as “the system by
which companies are directed and controlled”. Moreover,
another problem of separation between ownership and control
was brought into spotlight by Adams Smith, where few
competent individuals are justified in running a company i.e.,
directors who manage the company owned by shareholders
hosting supervisory role but have a little say in day-to-day
management. One must note that the law has bestowed
abundant powers to directors which may have a detrimental
effect as the director may become negligent towards the
company, this however may only occur if the shareholder fails
on his part of oversight of directors rather, they become drunk
on the absurd profits they bring.
That apparent main issue was the institutional investors were
fixated on making profit rather than supervising over company
affairs, this allowed the directors who capitalized on the
situation, abused their authority by taking ultra-varies
decisions, and set themselves with high remuneration packages
as the shareholders were asleep on profit charts they would
accept these packages blindly, therefore reforms were
introduced particular to tackle the challenges of the board
room accountability and diversity.
Previously, the Cadbury Committee emphasized the issues of
accountability and director remuneration, this was further
elucidated by Greenbury Committee that solely focused on the
remuneration matter and was further fortified and combined by
the Hampel committee and ultimately was evolved into ‘the
Code’ of corporate governance by the London Stock Exchange.
The code prioritized on wider boardroom accountability by
focusing on adding appropriate number of Non-Executive
Directors (NEDs) within the board, having auditing committees
of the board, remuneration and appointment to guarantee
decision making transparency. Furthermore, the code also
focuses on executive remuneration as this issue was on the
issue company exploitation by directors was escalating in UK.
We see in Higgs review, he emphasized on boardroom
accountability, wherein, Walker’s report it was explicated to
regulate executive director and key employees pay also to
disclosed in company’s annual reports, overseen and managed
remuneration committee, also boardroom must host wide array
of NED’s to support in transparent decision making.
Nevertheless, academics did not openly welcome it as they
thought it to be a review of all committees that were brought
before this report
The Code of Corporate Governance 2018 was the culmination
of suggestions placed by all the committee’s, it prioritized on
the core themes of accountability i.e., adequate number of
NED’s at board level and remuneration i.e., no director can be
involved directly or indirectly in their remuneration terms. This
exemplifies why a board room requires NED’s and
remuneration committees who interpret director remuneration
based on their long-term performance then in a case director
having exorbitant remuneration package and low performance
may be challenged.
Also, we must note that if there is non-compliance of the Code
by individuals, that individual shall not be subjected to breach
any form of sanction, contingent they are able to explain why
they failed to comply this is known as the comply and explain
approach. This is deemed as a soft law that was devised by the
Cadbury committee and is inscribed within the code; however,
one may say its effectiveness is questionable as its scope is
limited to only stock exchange listed companies and this is the
major issue that resides with this code. The code that was
created to bring clarity to some extent it did but also brought
with a certain uncertainty that previously wasn’t there adding
onto the list of existing problems.
The question above denotes, a key issue in respect of corporate
governance is directors’ remuneration, which was defined
above. This issue was witnessed in CEO-WPP case where the
accused had drawn up an exorbitant salary package for himself
over 48 million and so in order to avoid issues like this the code
continually iterates to create remuneration committees, add
NED’s and make remuneration packages transparent. This was
also affirmed in Kay report which was later amalgamate into
the code that remuneration should be proportional to the
company’s long-term growth.
Although we have witnessed measured taken for the resolving
executive pay issue in large corporations, but this was one issue
that quite problematic leaving a gape within the law of
corporate governance. The biggest hit the corporate sector
faced in the UK was in the 2007 financial crisis, when the entire
banking system collapsed, however at that majority directors
had a high set of executives’ pay on such e.g. was the Bank of
Scotland where the chief execution remuneration package
exceeded four million pounds. A remuneration commission
compiled a report by conducting independent review on the
matter, the found that directors high pay created economic
disparity within society and thereby proposed a solution to
make the top 10 company salaries public knowledge inking it in
the annual report.
The subsequent issue was of the board diversification however,
there’s no uniform definition of board diversity. Conventionally
speaking, one may consider factors like race,gender, age,
educational upbringing and professional experiences of the
directors to make the board less homogenous. In short, board
diversity aims to promote a wide range of demographic
qualities and traits in the boardroom. In time novel issues like
gender diversity of the board was presented in Davies report
2011, which detailed that there must a greater involvement of
women at board level and this was successfully enforced in
2012 where a board level must have a set percentage of
women representatives. This change was witnessed in the
corporate industries giants Amazon, Microsoft, Apple etc. and
the benefit of having such diverse board was that it allowed to
take healthier decisions and overall company performance
excelled.
Additionally, the prior reforms focused more on effectiveness of
the board and the latter reform placed emphasis on
shareholder activism which recommended that greater
shareholder participation so that there is better oversight on
the directors that may abuse powers in their own favor, to
tackle this very purpose Stewardship Code was birthed. Its
purpose was to overcome shareholders short-sightedness and
instructs them to create a clear policy which governs how board
shall be scrutinized. Furthermore, the Code released in 2020
talk about all institutional investors i.e., stakeholders’ interests
that would lead to healthy benefits. This elucidates that it may
be used where no remedy is absent in the Corporate
governance Code then such code may be use on the basis of
comply and explain principle that allows to have a check and
balance on unjust executive remuneration packages and other
accountability related issue.
With the reforms we discussed are more or less curtailing to
soft laws, however the legislators have addressed the issue
above in the form of hard laws. Codifying the Director Duties
was imperative in making positive improvements in the law of
corporate governance and the statutory provision S.172 of
Company’s Act 2006 which talks about promotion of the
company’s success, in settling such duty, the director is
mandated to preserve a proper relationship with its employees,
customers and suppliers. Also, the director must reasonably
achieve results that upholds high business standard conduct
and keeping in mind to run the company line with shareholder
interest. So, if a director has high salary that cannot be justified
it may be said to be against promoting the success of the
company and this would be construed as breach of their
director duties. Lastly the newer version of the code dictates
that NED are an indirect voice of all the employees, thereby
making such reforms have had a fructuous effect leading to
comprehensive, effective and diversified board.
Moreover, there are certain disclosure in law ingrained by
legislature in Companies Act (CA) 2006 to tackle this issue.
S.439 of CA mandates a special notice to members must be
given if company intends to pass resolution for approving
director remuneration and S.422 of CA explains that the
remuneration must have statutory compliance and have board
approval, failure would result in director to be sanctioned. Such
are the hard laws when executive pay is beyond proportionality
and having a diverse boardroom with NEDs can minimize the
chances of such issues.
Furthermore, the pay gap between executives and other
worker increased which resulted in the Company Regulation
2018 that stated that the quoted company are mandated to
make their ratio of CEO and average employee remuneration
transparent to the public. This itself will assist in keeping a
check and balance on director setting absurd remunerations
and a diverse board with NEDs will make it work.
To conclude, the discussion above elucidates that UK law does
ensure these things as the Code of Corporate Governance has
improved the problematic issues that persisted back then and
now there are diverse boardrooms that keep a check and
balance on the executive directors, however, the problems
have not completely been vanished, but the company’s
spectrums have become much better than before.
(1726 words)