The FRC have picked up on mounting public anger regarding extortionate levels of Executive Director pay; enough is enough. For too long too much has gone to the top and too little to those lower down the pecking order. The average salary for the Chief Executive of a FUTSI 100 company is £5 million a year; and the inequality worsens every year. Discontent is so widespread that the Business, Energy and Industrial Strategy (BEIS) Select Committee and even our new Prime Minister are also calling for change.
This isn’t a new problem. In 1995 Sir Richard Greenbury published his report which had been commissioned to look at what needed to be done to address excessive executive pay. Twenty one years later it is clear the report’s recommendation for changes to corporate governance have proved insufficient.
So yesterday the FRC announced it will be taking corrective action and in my opinion their intended actions are spot on. FRC stands for Financial Reporting Council. It is the national regulator responsible for setting UK corporate governance best practice.
They point out that directors on company boards are not paying regard to their responsibilities as set out by law in the Companies Act 2006. Sections 171 to 177 set out seven key responsibilities expected from a director. In particular uncontrolled executive pay (along with several other corporate woes which most recognise well but I shall not go in to here) is down to a disrespect of Section 172:
172. Duty to promote the success of the company
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
This section of law clearly sets out that companies should avoid short termism, have regard for the interest of their employees, the community and the environment and seek to maintain a reputation for high standards. However spurred on by unpleasant socio-economic behaviours supported by thinkers such as Milton Freidman, many large corporates have quite happily ridden rough shod over these requirements. This has resulted in much of the corporate world becoming entirely self-centered and self-rewarding at the expense of society as a whole; a perverse race to the bottom of moral standards.
So the FRC’s message is welcome:
- Boards should pay more attention to their responsibilities under Section 172 of the Companies Act 2006 to both shareholders and wider stakeholders and should report on how they have discharged these.
- The Government should review the enforcement framework in order to establish an effective mechanism for holding directors and others in senior positions to account if they fail in their responsibilities.
The second point refers to the need to ensure Directors’ responsibilities are enforced since at the moment only the weakest of enforcement exists leading to fragrant disregard of the law.
I can’t emphasise how pleased I am to see this shift in national sentiment being reflected at the heart of where it matters. Businesses aren’t just about making profit at the cost of everything else. Like every individual and organisation they have a responsibility to above all serve society.
The indication that the FRC is having to resort to amending UK Corporate Governance to address the disregard for Section 172 (effectively beefing up the stick as opposed to carrot) raises the question why “the markets” haven’t addressed the shortfall in behaviour which is displeasing the public.
In my view strengthening the application of Section 172 of the Companies Act addresses the biggest downfall in our current capitalist model – and represents an attempt to drag capitalism out of the dark and back in to the light where it can truly serve society as it should. I hope the move will have the effect it intends!
Strategies and policies signify decisions; usually made collectively by a group and developed over a period of time. They are made by people, based on their representations of the particular World situation. See my December 2012 post “Making sense of reality” which explains how representations form the fundamental psychological construct which enables individuals and communities as a whole to make sense of the World around them.
Faced with a decision an individual, or group of people, can either make it immediately using their existing World representations or they can postpone the decision to first actively seek to inform their existing representations. For low risk and routine decisions there may be no need to postpone, but when the stakes are high and the complexity great then taking more time to get it right is usually the best option.
Strategy, policy and decisions are delivered by and through social means. The World situations within which they act are so complex as to often be difficult if not impossible to fully understand – let alone make an accurate representation of. In fact as my March 2015 article “Why a mutual?” indicated, hopes of uncovering an absolute truth might as well be parked. It is more a question of how much effort do you want to – do you need to – and are you able – to put in to getting closer to the truth?
And this is a really important question.
A corporate strategy seeks to align the functions of a business in relation to the outside world to achieve a vision and/or number of corporate goals. Sub-strategies and policies do similarly just with the internal and external boundaries differently defined.
The first step is for the corporate strategy to look within and in particular beyond the organisation by developing a representation of the World and situating the organisation (at least its representation of itself) within the World representation. This is the starting point from which the organisation and the World are to be manipulated to attain a future favourable situation for the organisation.
The implication of getting the starting point wrong for the organisation is like blindfolding a person trying to navigate an obstacle course. Whereas investing time in developing an accurate representation gives a business its sight enabling it to safely navigate the World and quickly establish workarounds for new obstacles unexpectedly thrown in.
This is what led Dwight Eisenhower to say:
”Plans are worthless, but planning is everything.”
Eisenhower believed the knowledge of the environment gained during the planning process kept the planners “steeped in the character of the problem” which then allowed organisations to effectively understand and manipulate the reality around them.
In practice developing a representation of the World situation often involves using a mnemonics such as PESTLE, PEST or SWOT to help remind us of key broad elements of the World to consider. During the process, and with a number of other thinking tools available to apply, we actively look into the business’ external environment for evidence of relationships between things, trends, certainties, uncertainties, facts, fiction, risks etc. The more thoroughly we do this, the better the representation of the World situation will be.
A crude and inaccurate sketch map of the World based on a cursory glance will lead to ill-informed strategy, blind the business and likely cause failure. A comprehensively developed view of the world however, fully anchored in detailed evidence, will do the opposite.
I have too often seen the importance of this step completely undervalued. Notional, colloquial or half-hearted efforts to understand the situation are hastily packaged and then appended with a wish list from the dominant power within the business – often because the priority is simply to produce a document labelled strategy or policy for X or Y. This misses the point that it is the process leading up to the document that actually holds the value – the document merely evidences the process. The cost of this mis-prioritisation cannot be over exaggerated since as well as for understanding the organisation and World and engaging with both, the World representation is used for:
- understanding and managing risks,
- communicating, convincing and inspiring employees and stakeholders,
- building subsequent business cases,
- learning lessons by reviewing and amending it as knowledge grows and circumstances evolve,
- measuring and demonstrating progress,
- giving leaders the confidence they need to lead.
So what can we do to make the representation best serve these purposes?
- Bring to bear as much evidence as possible, prioritising what is considered the most relevant first,
- Use a scientific evidence based approach,
- Engage all stakeholders who carry their own sets of experience (evidence) which can then be pooled with that of the organisation (see also “Why a Mutual”),
- Minimise the psychological distance between the
observer (who is preparing the decision) and the object being observed (as my April 2012 essay “Can Communities Think” addresses). The added insight this enables ensures the strategy, policy or decision’s vision is a) based on a more accurate representation of the World and b) provides psychological pathways with minimal barriers for its stakeholders to engage with it.
Following this advice above might sound complicated – however there are well established strategy and policy development methodologies that can be flexibly applied to deliver these outcomes. Invariably they lead to a written strategy, policy, decision document. Leaders and decision makers should use these documents to ensure there is evidence of the methodology being followed with the necessary emphasis on developing the World and organisation representations. Ensuring a suitable and common methodology is widely understood by senior employees within the organisation is fundamental for
organisational leaders. It should be sufficiently inculcated into the organisation’s way of doing business so that collective expectations revolve around applying it smoothly, properly and consistently.
Whilst these processes may seem onerous, it is difficult to overstate their value and importance.
I close this article with Albert Einstein’s famous quote “If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”
The Prime Minister is clear that leaving the EU means for UK ending the right of EU people to come to reside and/or work in UK. Similarly the EU is clear that without participation in freedom of movement, there can be no access to the EU single market.
Liam Fox, David Davis and Boris Johnson are lined up to tackle this challenge head on. Any negative impact on trade with the EU resulting from withdrawal from the single market will be counteracted with a strategic repositioning of the UK on the global stage, namely a massive increase in free trade between the UK and the rest of the World. Liam Fox speaks of a renaissance of a two hundred year period in history where Britain led world trade – he refers to the 18th and 19 centuries.
However if the UK is to pin its hope on a strategy or a vision to bring about a new strong and global position in free trade, then this period of British imperialism and mercantilism partly if not largely brought about through piracy, bribery, jobbery, military force, colonisation and slavery (or profits from it) is not it.
A stronger position in global trade will be brought about by a strong, innovative, entrepreneurial people, nurtured and supported by a country with just government and institutions which work for everyone and champion meritocracy, opportunity and equity. That’s my vision and that’s the Prime Minister’s vision.
Humanity has always been gripped by an urge to seek knowledge; “the truth”. Quite possibly because people believe having knowledge is most likely to help them live a happy and successful life e.g. find a good job, have enough food, find a partner, buy a home. However before you can look for knowledge, you first have to know what it looks like – what does it or does it not consist of? Fortunately for us Philosophers have for thousands of years, through the subject of Epistemology (literally meaning the study or knowledge or understanding) specialised in trying to establish the answer to this very question. For much of this time it was claimed that knowledge was Justified True Belief (the JTB model) i.e. something that was true, believed and could be justified. However this model has never fully satisfied critics, for the model always required other bits of knowledge in order to do the justifying with. Another epistemological model claims that there is no ultimate truth. The truth is what a community holds to be true. Today the community could believe the World is flat and for all intense purposes it is, and tomorrow it could believe the World is round. This would then constitute the new truth or knowledge. This form of epistemology is the foundation of the philosophy of pragmatism. The truth is what is believed by a community and allows it to survive.
So then what should a community believe. Well it could start by believing what it has seen with its own eyes. Surely if I throw a ball up in the air 100 times and it falls back to my hand, then if I do it once more the same will happen again? Well one would have thought so. However for hundreds of years philosophy has struggled with the problem of induction (or inductive reasoning). Inductive reasoning states that known facts can be used to predict the future e.g. because of gravity if I throw a ball up in the air, it will come back down again. However the problem of induction was a concern that there was no way of guaranteeing that something would not change, e.g. the laws of physics, or had not previously been observed; which meant on the 101st throwing of the ball in the air, it might just not come down. The basis of this concern is that in the vast World in which we live, what seems even a very simple situation is in fact infinitely complicated and so the next time we experience what appears to be an identical situation, it may actually unfold in a way previously unseen. Newton’s laws of gravity were held as an absolute truth for 2 centuries until new means of observation at sub-atomic level exposed anomalies with the laws; which prompted Einstein to discover the theory of relativity and supplant Newton’s laws.
So then what does this have to do with mutuality? Well a mutual organisation is a community consisting of members with certain shared values. Members are considered equal and have one vote each for deciding on key issues. This gives equal right to each member. It recognises each member’s set of personal experiences and beliefs which leads him or her to form an opinion before voting for a decision. This is important because by giving everyone’s personal experiences and beliefs equal validity a mutual takes into account every member’s experience of throwing a ball up into the air and the subsequent result. If one of those members had genuinely seen the ball not come down again, there would be reason to question whether or not belief in Newton’s or Einstein’s laws was sound and whether or not the mutual’s following of such principals was still likely to secure happy and successful future for its members.
By pooling together the views and experiences of the whole community, you are maximising your chances of someone seeing something which calls into question the validity of an existing theory and thus enables the community as a whole to investigate the theory in greater depth and if necessary remove and replace it. So this is the strength of a mutual. A mutual makes the determination of the truth (the determination of the right thing to do) everybody’s business.
Does the internet not have the most amazing ability to embezzle those few precious hours of freedom following ones return home from work? Superfast broadband able to bring to one at the slight depression of a finger an unending assortment of jokes, quotes, messages, news, explanations, anecdotes – in fact these days one merely needs to utter the words “Okay Goog…” followed by whatever spurious request that strikes ones fancy and immediately and unquestioningly the digital world-wide brain of knowledge is plumbed and an answered picked out for us and neatly presented on the screen in front of our very eyes…… How could one not be ensnared?
But time is slipping by and with it opportunity. Why not instead ink one’s quill and pen some words of received wisdom? Vent ones spleen after the day’s antagonisms? After all paper has no way to quell beliefs and aspirations. But of course is there the need for any more than oneself for this to indeed happen? Where to start? Where to end? How not to doubt oneself?
Luckily for me however a good friend of mine reminded me that the parchment of a blog is little more than the opening statement of a conversation. No more… no less…. How many times has one in anticipation made the opening statement to a conversation only to find no response is forthcoming. Ones words had no more effect than the exhalation of ones breath and yet no harm is done.
And so today pen has touched paper, digits depressed keys and what is there of it? Well if there is no more than nothing then no harm and otherwise perhaps the unexpected. For me, no more than that is reason enough.