Corporate Governance Reform green paper: CFA UK response

Tuesday 7 March 2017

CFA UK believes that UK Corporate Governance standards are relatively high but CEO compensation is not well aligned with value creation.

The UK government's Green Paper on Corporate Governance Reform states that 'the behaviour of a limited few has damaged the reputation of the many'. This suggests that, on the whole, corporate governance in the UK works reasonably well, although the public’s perception is less positive. We agree that UK corporate governance is of a relatively high standard. As such we do not believe there is a need for significant change to the existing policies however we would be happy to see some tightening up of the rules. In particular, we would welcome a strengthening of the corporate governance framework for the UK’s largest, privately-held businesses in order to level the playing field between public and private equity capital markets.

Both the Prime Minister’s and the Secretary of State’s comments in the green paper list executive pay – and the need to align pay with long-term performance as the first item on which they comment. This is telling. There are many other corporate governance issues besides executive pay, but it is clear that the desire to improve the ability of investors and remuneration committees to determine pay has significantly influenced the green paper.

CFA UK recently supported research undertaken by Lancaster University Management School that suggests the link between performance-related pay structures and economic value creation is weak. The research was based on an analysis of Chief Executive Officer (CEO) pay structures and their alignment with corporate value creation for FTSE-350 companies over the period 2003-2015. Simplistic metrics of short-term performance such as earnings per share (EPS) growth and total shareholder return (TSR) are the dominant means of measuring performance in CEO remuneration contracts today. Worryingly, these metrics correlate poorly with theoretically more robust measures of value creation that relate performance to the cost of capital.

We believe that remuneration committees are generally very diligent in reaching out to shareholders and stakeholders to discuss compensation structures. There is an intense focus on pay levels coupled with calls to find better ways of aligning senior executives’ incentives with long-term value creation. We welcome the Green Paper as an opportunity to extend and advance that debate.

Read CFA UK's detailed response to the Green Paper on Corporate Governance Reform.