U.K. reforms bring workers' voices to corporate boards — changes Canadian regulators are watching

The U.K. is stiffening the rules large companies must follow, in an effort to rein in executive pay and bolster the input of ordinary employees in the running of their firms. The changes are expected to nudge Canada in a similar direction.

The changes are expected to nudge Canada in a similar direction

The United Kingdom is tightening corporate rules around executive pay and employee input; there are calls for Canada to follow suit. (iStock)

The United Kingdom is stiffening the rules large companies must follow in an effort to rein in executive pay and bolster the input of ordinary employees in the running of their firms.

On Tuesday, the government outlined a series of changes. Large publicly-traded companies will have to report annually the ratio of CEO pay to the average pay of their U.K. workforce.

The rules around an existing requirement for shareholders to vote on executive pay will also be tightened.

Canadian regulators watching

U.K. corporate governance rules are already more stringent than those in Canada. And observers here say the changes will put additional pressure on Canadian firms to open executive compensation to more scrutiny.

"This is the way the world is going," said Richard Leblanc, associate professor of governance, law and ethics at York University. "Canadian regulators will absolutely take note of this, and Canadian companies will need to too."

As well, the U.K. rule changes demand that corporate boards give greater voice to employees at the boardroom table. It's something that recently became an issue in Canada, when Sears Canada laid off employees without severance, while executives of the insolvent company were offered retention bonuses.

Employees to gain the board's ear

Under the new rules, U.K. firms will choose from several options: nominating an employee representative as a company director, convening a worker council to communicate with the board, or assigning a non-executive employee the responsibility of representing employee issues at the board level.

"It's a measure that puts the onus on companies to explain how they're giving employees a bigger voice … that's a pretty reasonable approach from our point of view," said Edwin Morgan, interim director of policy at the Institute of Directors in London. 

Inadequate corporate governance, and particularly, massive executive pay became a touchstone for public anger during the credit crisis, starting in 2008. Governments — especially in the United States and the U.K. — vowed to tighten the rules, even as they provided billions of dollars to prop up foundering private banks and other corporations.

Say-on-pay votes

Since then, so-called say-on-pay votes have become mandatory in jurisdictions including the U.K., the U.S. and Australia. In Canada, the Institute for Governance of Private and Public Organizations reports that 80 per cent of the largest companies have voluntarily adopted the practice, subjecting executive pay to an annual shareholder vote. But those results are not binding. Dr. Leblanc said that if Canada is to strengthen rules, this would be a logical place to start.

He also noted that the cases of both Sears Canada and Postmedia Network Inc. have thrown the issue of high executive pay in Canada into sharp relief. At Postmedia, employees have been asked to volunteer for buyouts or risk layoffs, even as top executives were offered large retention bonuses. CEO Paul Godfrey was awarded $900,000, paid between July 2016 and July 2017.

In addition, Bombardier recently tried to pay members of its senior executive team bonuses of $32 million, having accepted bailout funds from both Quebec and the federal government last year. Public outcry forced the firm to modify that plan.

Under a new plan, Bombardier CEO Alain Bellemare, pictured, and five other executives won't get their full $32 million in additional compensation until 2020, and even then only if the company hits certain financial targets. (Paul Chiasson/Canadian Press)

Anita Anand, a law professor at the University of Toronto and an expert in corporate governance, said Canada lags the U.K. in requiring transparency in executive pay. "These appear to be very valid questions [raised in the U.K.] that we should be asking in the Canadian context."

Under the proposed U.K. regime, a public register would be kept of corporate pay votes, as a kind of shaming mechanism. When strong dissent (over 20 per cent of votes) is registered against executive pay awards, companies will be forced to articulate a plan to address concerns. 

Mixed reaction 

The slate of changes met a mixed reaction in Britain. A number of labour groups, as well as opposition parties, charged that the government has not gone far enough. But industry representatives gave at least lukewarm support.

"It's important that companies have been left to decide from a number of options available to them. Namely that they are not being forced to appoint an employee to the board of directors," said Morgan. But he called the pay ratio requirement a "blunt instrument" that will produce "weird anomalies."

CEOs in sectors with a large number of low paid employees are liable to look comparatively worse than those with fewer employees. Meaning that the CEO of an investment bank is likely, by the ratio yardstick, to compare more favourably with the average employee of the firm than the CEO of a grocery chain. 

Most of the new requirements would be enforced on a "comply or explain" basis, whereby companies can opt not to undertake any changes, so long as they explain why.

A spokeswoman for the Ontario Securities Commission — which oversees Canada's largest capital market — said it is "monitoring international developments."