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The zeal to change corporate culture shown by the UK’s prime minister, Theresa May, and her government has caught company bosses off guard. But the proposed policies that have caused most consternation are the ones playing on a raw human emotion to which British sensibilities are especially prone: embarrassment.
Naming and shaming has become a popular tool for regulators around the world. From clamping down on pay discrepancies to trying to make supply chains more ethical, policymakers have attempted to influence business practice by exploiting companies’ obsession with protecting their brand.
Such policies are popular with politicians as they allow them to affect corporate behaviour without appearing too heavy-handed. In straitened times, they also limit the need to carry out costly enforcement.
When Mrs May launched her campaign to become UK prime minister in July, she said she wanted to bring in rules to make companies reveal how much their chief executive is paid compared to the average worker. The policy is based on one brought in last year by the US Securities and Exchange Commission, which regulates markets.
The idea behind the SEC’s so-called pay-ratio rule is to expose companies where executives earn vastly more than average workers compared to their peers and to embarrass them into changing their pay policies.
Yet on both sides of the Atlantic, pay-ratio rules have been criticised by business groups for being too crude. “The good news is there’s one figure everyone has to produce. The bad news is it’s reductionist,” says Ric Marshall, executive director of MSCI ESG Research, which analyses global governance trends.
Companies often react badly to state-sponsored naming and shaming rules. This was highlighted by business groups’ response to UK home secretary Amber Rudd’s proposed rule forcing companies to work out what proportion of their workforce is foreign and then share that information with the government. When announcing the policy at last month’s Conservative party conference, Ms Rudd indicated companies would have to make their findings public — infuriating business leaders and lobby groups, in the UK and abroad.
Adam Marshall, acting director-general of the British Chambers of Commerce, responded that businesses “would be saddened if they felt that having a global workforce was somehow seen as a badge of shame”.
Such was the outcry against the naming and shaming aspect of the policy that Conservative politicians were sent out to television studios to clarify that companies would not, in fact, be forced to publish their ratios of foreign workers. The data would be used only to help inform government policy, they insisted.
UK experiments with using the threat of embarrassment to regulate companies have not always been so controversial.
Earlier this year the government brought in rules that will require companies with more than 250 workers to publish by April 2018 the median and mean differences between what men and women earn. Women earn a median 19.2 per cent an hour less than men in the UK. Companies will also have to publish numbers of men and women in each salary quartile.
When it announced details of the plan in February, the government said it had not decided whether it would publish league tables to identify the worst offenders. Yet some employers are fearful that such disclosures will make them vulnerable to class-action lawsuits from female workers.
The US is also in the process of introducing disclosure requirements on gender pay. But the Obama administration is trying to take it a step further by forcing companies to provide the same pay data for race and ethnicity. In announcing the proposal in January, President Barack Obama said: “What kind of example does paying women less set for our sons and daughters?”
Philip Ryan, a partner at law firm Shoosmiths who specialises in regulatory defence, says disclosure rules are often accompanied by financial penalties. He argues, however, that the threat of public embarrassment has so far proved more potent than fear of fines.
“The jury’s still out on whether financial penalties really work. They send a message when they are considerable, but most companies are more concerned about the damage to their brand — no one wants to be the outlier in their industry,” he says. “Most companies are trying to show they are good corporate citizens.”
Mr Marshall of MSCI adds that disclosure rules are designed to put companies under pressure from three main groups. In the first instance it is the board of directors, who may have been unaware of certain practices within their companies. Then there is the media, which will highlight outliers and can influence consumers and politicians. The final group is investors, who have the power to vote against particular corporate policies and also against directors they feel are not tackling governance flaws.
“The aim here is not just to require companies to disclose this information but to bring the pressure of public opinion,” says Mr Marshall of MSCI. “But it’s via increased transparency and disclosure. It is more of a nudge from regulators to try to impact behaviour — which frankly makes sense. Why not let shareholders become the enforcers?”