Theresa May Got One Thing Right When She Was Bashing Business

(Bloomberg Gadfly) -- Theresa May called out the failures of British corporate governance after coming to power in 2016. The U.K. likes to see itself as an exemplar of good corporate behavior, yet trust in business is low and boardroom pay has skyrocketed. At May's behest, the standard-setters are proposing changes to the rule book for directors. An implicit duty to use common sense sadly wasn't working. Thankfully it could now be explicit.

The changes to the so-called Combined Code on corporate governance being suggested by the Financial Reporting Council make sense. On pay and perks, long-term bonus plans should make awards after five not three years, boards would have to think about pay policies across the entire firm, and remuneration committees would have to exercise discretion over whether directors deserve what they're paid.

Theresa May Got One Thing Right When She Was Bashing Business

Long-term pay plans are of dubious value, regardless of duration. Too often they crank out a number that's clearly too big and should be overridden. An explicit obligation to revise them where needed would be a check on bonuses that have nothing to do with a CEO's contribution to company performance -- itself only ever one part of a mix of internal and external factors.

The gulf between executive pay and the workforce has widened in recent years. Of course boards should be thinking about whether shop-floor staff are paid fairly. Meanwhile, board appointments would have to promote diversity, and directors would have to gather the views of the company's workforce and show it has engaged with them. All good.

It's a shame this needed to be codified in the first place. Directors of U.K. firms already have an overarching legal duty, dating back to 2006, to promote the success of the company for the benefit of its shareholders. The common interpretation in boardrooms is that investors always come first. This has skewed corporate decision-making in favor of short-term, seemingly investor-friendly measures like buybacks and capex constraint.

This undermines the primary obligation -- to the long-term success of the company -- and clouded other aspects of this such as the interests of staff, suppliers and customers, as well as the impact on the community and the environment. These stakeholders have to be legally considered too.

In practice, such obligations have proved hard to transform into long-term decision-making. A company that talks up dividends and capital discipline is lauded by the stock market -- look at the reaction to Royal Dutch Shell Plc's investor day last week. The challenge to pursue corporate success while keeping staff and society on board will only get tougher in a world of increased automation and artificial intelligence.

The code dates back 25 years. The political mood has moved against business since then and the rules are catching up. May has given boards a wake-up call. They need to catch up quick too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at

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