Senior management pay: dimensions of pay policy in business and the higher education sectors
Coincidentally, at about the same time that the higher education sector announced that it would publish draft guidance on executive pay (Times Higher Education, 14 December 2017), the Financial Reporting Council (FRC) was also issuing its proposals for a comprehensive review of the Corporate Governance Framework, which sets the basic expectations for FTSE listed entities on governance matters, including remuneration.
The FRC notes that there is a high degree of compliance with the existing Code, and the purpose of the revision is therefore largely to simplify the Code to ensure it is fit for purpose in the years to come. Yet one of the striking features of recent corporate governance has been the issue of executive pay, suggesting that thus far the Code has not come up with an approach to prevent this attracting bad headlines. Indeed, the proposed revisions sort of make this point: the consultation highlights the importance of corporate governance in ensuring that remuneration policy works well for the company; and also highlights that AGM resolutions on remuneration (either policy or practice) attract more opposition than any other. In other words, corporate governance is important in setting remuneration policy and levels for executives, but so far it has yet to make the issue go away amongst investors (let alone the public at large).
In many ways, however, the Corporate Governance Code is way ahead of the higher education sector. In the latter, it is only now being proposed that vice-chancellors should not sit on the remuneration committees that decide their pay, something that is already strongly discouraged in the Code. For those who have studied the Corporate Governance Code over a number of years, the fact that this approach still exists in higher education is revealing of how far university governance lags behind that of leading UK businesses.
But the existing evidence on the Code suggests that, even if universities bring themselves more in line with what is regarded as good practice in governance, it won't make the problem of executive pay go away. So what might? One way might be to rethink how choices are made and explained about executive pay.
Usually, the public explanation for a particular salary or bonus is that the sum announced is the 'market rate' for the kind of person the university wishes to employ. This probably means that few people move for less money, so the university in question has taken that person's existing salary, added a bit on, and come up with the new figure. In other words, there is a permanent inflationary spiral in executive pay. The consequence of this is that the issue is bound to recur in the media and amongst stakeholders, because increases are inevitable.
The headlines about pay might be (and are, frequently) dismissed by senior business and university figures as a lot of froth and not much substance; but they create a particular image, nonetheless. So, one question for both businesses and universities might be: does that image matter to you. Or, put another way, how far is the reputation of the institution factored into decisions about executive pay? Because, where people have a choice, reputation matters. This is particularly the case in England, where students might be tempted to make a link between the level of fees they pay, and the remuneration received by the de facto chief executive of the university to which they have applied. And whilst individual shareholders might not have much influence over corporate executive pay, the institutional shareholders (like pension funds) certainly can do, and their choices would be felt by corporations.
It would not harm either universities or businesses to set out the criteria by which they will set remuneration for executives. We can only hope that there are criteria there beyond 'the market rate'. But I would be willing to bet that 'reputation' is not currently there for the majority. This is unfortunate, because it then personalises the issue when it arises. It moves from being an issue of policy (which is the problem) to the personal greed of the executive who takes the money (which is problematic, because let's be honest, how many of us would turn down a salary and ask for less money?).
So, this might be the challenge under the new Corporate Governance Code, and the guidance on executive pay in the higher education sector: explain how these choices are being made, and discuss them with your stakeholders before the decisions are actually made. Take the personalities out of the issue, and put the attention where it belongs: the actual practice of corporate governance in both business, and the higher education, sectors.
Sources used
Times Higher Education
https://www.timeshighereducation.com/news/new-guidelines-set-steer-uk-v-cs-away-pay-panels
Financial Reporting Council, Code of Corporate Governance (2016)
https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf
Financial Reporting Council, consultation on revisions to the UK Code (2017)
http://www.frc.org.uk/getattachment/31897789-cef6-48bb-aea9-f46b8cf80d02/Proposed-Revisions-to-the-UK-Corporate-Governance-Code-Dec-2017-1.pdf
Saturday 23 December 2017
Sunday 26 November 2017
High Speed 2 Ltd, the Department for Transport, and public accountability
The most recent set of accounts published by High Speed 2 Ltd (HS2 Ltd) make for compelling reading. This is mainly due to the fact that, thanks to a published NAO report, a published internal audit report, and a Public Accounts Committee (PAC) hearing, we know that the accounts were qualified by the auditor due to an unauthorised redundancy scheme instituted by HS2.
The auditor's qualification comes as something as a surprise, given the emphasis within the front half of HS2's accounts on corporate governance, internal controls, and - startlingly - a link to the framework agreement with the Department for Transport (DfT) that is at the heart of the whole problem. So it is a bit like a slow-motion car crash as you wait for the impending disaster to fall with the audit report.
The internal audit report provides the fullest explanation of what happened, which in summary is: HS2 asked permission to pay redundancy monies to staff that were higher than that stipulated in the framework agreement with the DfT; the Department refused to give its permission; and four days later, HS2 went ahead with the scheme anyway.
The crux of the problem appears to have been that the email from the DfT refusing permission for the scheme was neither copied in to anyone, or subsequently forwarded by the recipient (the then Chief Executive). So when the CEO at the time resigned to take up a new post, effectively that knowledge disappeared.
The episode is a good example of the problems of corporate memory in an organisation going through frequent structural change. A look through recent HS2 annual reports shows a different organisation chart almost every year. With the best will in the world, ensuring that everyone has the information they need under such circumstances is going to be tough. It is also a lesson for government departments sponsoring such companies: always copy others into emails.
But in many ways, the story is about accountability, and in particular the value of democratic accountability for the way in which public money is spent. Through audit, then internal audit, and then finally the PAC, ever more details of the story have emerged. And whilst the NAO report spelt out some of the internal control issues, and the internal audit report found much more (and much worse), they show limitations: even these reports only refer to 'a senior official' at the DfT emailing a 'very senior official' at HS2.
The reticence is a bit odd, because for accountability to be properly effective, surely we need to know at least the roles (and also the names?) of the individuals in question. Questioning at the PAC at least supplied one of them: the 'very senior official' was ex-CEO Simon Kirby, who was quoted in the Financial Times as denying doing anything wrong, largely because he had left by the time the scheme was launched.
By strange coincidence, my public sector accounting course was looking at audit and accountability this week, and it was recognised that the very public accountability provided by the PAC is the ultimate, democratic accountability of tax-spenders to tax-payers. And whilst its main job is to hold everyone else to account, it is also noticeable how PAC hearings introduce a new context in which to view issues, one that perhaps officials do not always share. This is perhaps why the official reports do not 'name names', but the PAC wanted to know them. But it goes further than this: when Bernadette Kelly, Permanent Secretary at the DfT, says that no action is planned against Simon Kirby because he is no longer a contracted employee of HS2, the Committee is clearly not impressed, and wants DfT to explore all legal avenues to hold the former CEO to account.
For all the weaknesses in public sector audit - and auditing more generally - HS2 has been held to account. The 'after the event' nature of being held to account means that the unauthorised spending will probably never be recovered. But it is a salutary lesson for other government-owned companies, particularly those like HS2 going through internal change. Official auditors might deliver bad news, but the glare of the PAC is another matter altogether, and if a company can avoid it by getting things right first time, they will be doing themselves a big favour.
HS2 Ltd annual report and accounts:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/637655/hs2_annual_report_and_accounts_2016-17_print.pdf
NAO report on the redundancy scheme:
https://www.nao.org.uk/wp-content/uploads/2017/07/Report-of-the-Comptroller-and-Auditor-General-on-the-2016-17-Accounts-of-High-Speed-Two-Limited.pdf
Internal audit report:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/654854/hs2-ltd-redundancy-schemes-audit-report.pdf
PAC oral evidence:
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/public-accounts-committee/high-speed-2-annual-report-and-accounts/oral/72377.html
I also referred to two articles in the Financial Times, from 26 October 2017 and 30 October 2017.
The most recent set of accounts published by High Speed 2 Ltd (HS2 Ltd) make for compelling reading. This is mainly due to the fact that, thanks to a published NAO report, a published internal audit report, and a Public Accounts Committee (PAC) hearing, we know that the accounts were qualified by the auditor due to an unauthorised redundancy scheme instituted by HS2.
The auditor's qualification comes as something as a surprise, given the emphasis within the front half of HS2's accounts on corporate governance, internal controls, and - startlingly - a link to the framework agreement with the Department for Transport (DfT) that is at the heart of the whole problem. So it is a bit like a slow-motion car crash as you wait for the impending disaster to fall with the audit report.
The internal audit report provides the fullest explanation of what happened, which in summary is: HS2 asked permission to pay redundancy monies to staff that were higher than that stipulated in the framework agreement with the DfT; the Department refused to give its permission; and four days later, HS2 went ahead with the scheme anyway.
The crux of the problem appears to have been that the email from the DfT refusing permission for the scheme was neither copied in to anyone, or subsequently forwarded by the recipient (the then Chief Executive). So when the CEO at the time resigned to take up a new post, effectively that knowledge disappeared.
The episode is a good example of the problems of corporate memory in an organisation going through frequent structural change. A look through recent HS2 annual reports shows a different organisation chart almost every year. With the best will in the world, ensuring that everyone has the information they need under such circumstances is going to be tough. It is also a lesson for government departments sponsoring such companies: always copy others into emails.
But in many ways, the story is about accountability, and in particular the value of democratic accountability for the way in which public money is spent. Through audit, then internal audit, and then finally the PAC, ever more details of the story have emerged. And whilst the NAO report spelt out some of the internal control issues, and the internal audit report found much more (and much worse), they show limitations: even these reports only refer to 'a senior official' at the DfT emailing a 'very senior official' at HS2.
The reticence is a bit odd, because for accountability to be properly effective, surely we need to know at least the roles (and also the names?) of the individuals in question. Questioning at the PAC at least supplied one of them: the 'very senior official' was ex-CEO Simon Kirby, who was quoted in the Financial Times as denying doing anything wrong, largely because he had left by the time the scheme was launched.
By strange coincidence, my public sector accounting course was looking at audit and accountability this week, and it was recognised that the very public accountability provided by the PAC is the ultimate, democratic accountability of tax-spenders to tax-payers. And whilst its main job is to hold everyone else to account, it is also noticeable how PAC hearings introduce a new context in which to view issues, one that perhaps officials do not always share. This is perhaps why the official reports do not 'name names', but the PAC wanted to know them. But it goes further than this: when Bernadette Kelly, Permanent Secretary at the DfT, says that no action is planned against Simon Kirby because he is no longer a contracted employee of HS2, the Committee is clearly not impressed, and wants DfT to explore all legal avenues to hold the former CEO to account.
For all the weaknesses in public sector audit - and auditing more generally - HS2 has been held to account. The 'after the event' nature of being held to account means that the unauthorised spending will probably never be recovered. But it is a salutary lesson for other government-owned companies, particularly those like HS2 going through internal change. Official auditors might deliver bad news, but the glare of the PAC is another matter altogether, and if a company can avoid it by getting things right first time, they will be doing themselves a big favour.
HS2 Ltd annual report and accounts:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/637655/hs2_annual_report_and_accounts_2016-17_print.pdf
NAO report on the redundancy scheme:
https://www.nao.org.uk/wp-content/uploads/2017/07/Report-of-the-Comptroller-and-Auditor-General-on-the-2016-17-Accounts-of-High-Speed-Two-Limited.pdf
Internal audit report:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/654854/hs2-ltd-redundancy-schemes-audit-report.pdf
PAC oral evidence:
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/public-accounts-committee/high-speed-2-annual-report-and-accounts/oral/72377.html
I also referred to two articles in the Financial Times, from 26 October 2017 and 30 October 2017.
Subscribe to:
Posts (Atom)