Corporate governance reform and corporate failure in the UK, Comp. Law. 2021, 42(4),...

For educational use only

Corporate governance reform and corporate failure in the UK
Dr Edwin Mujih *

Journal Article

Company Lawyer

Comp. Law. 2021, 42(4), 109-119

Subject
Company law

Other related subjects

Accountancy; Insolvency

Keywords
Accountancy; Board of directors; Corporate governance; Corporate insolvency; Directors' remuneration; Regulatory reform

*Comp. Law. 109 Abstract

This paper examines the incidents of recent high-profile corporate failure in the UK in the light of corporate governance reforms
focusing on three areas of corporate governance, that is, board failure, inaccurate accounting and directors’ remuneration. 1

Introduction
The rate of corporate failure in the UK has been increasing at an alarming rate in recent years with one in every 213 companies
falling into liquidation in 2017. 2 Official figures released recently by the Insolvency Service in the fourth quarter of 2019
show that there were 17,196 underlying company insolvencies in 2019, a 6.8% increase on 2018 and the highest level of
underlying insolvencies since 2013, 3 although this represents a 1.8% decrease in the last quarter of 2019 after a rise in the three
consecutive quarters between 2018 and 2019. 4 The Insolvency Service attributes this rapid increase to a rise in underlying
creditors’ voluntary liquidations. 5 In the past few years, there have been reports of high-profile corporate failures every year.
In fact, such failures now appear to be a common feature of the corporate world in the UK.

The collapse of Carillion in January 2018 is said to be the biggest corporate collapse in the country for a decade. It sent
shockwaves in the corporate world which reverberated across many sectors in the UK and abroad, given that the company had
operations in many industries both in the UK and around the world. The collapse of Carillion came on the heels of other high-
profile corporate failures such as BHS. And, hot on the heels of Carillion were other high-profile corporate failures such as
British Steel in May 2019 and Thomas Cook, the British travel firm, in September 2019. Moreover, the current coronavirus
pandemic is likely to lead to further corporate failures. But the impact of the pandemic on corporate governance is not the
subject of this paper. Perhaps what is worrying is that in many cases, these failures are usually preceded by the publication of
good accounting records for the company giving it a clean bill of health. This alone should raise questions about the state of
corporate governance or the effectiveness of corporate governance reform in the country.

At the same time, there has been regular corporate governance reform in the country since the first review of corporate
governance issues, the Cadbury Report, was published in 1992. It is well-known that the Cadbury Report led the way for
corporate governance reform not only in the UK but in other countries around the world. Many countries have chosen to
model their corporate governance codes on the UK Corporate Governance Code (the Code), with some variations to take
into account local realities. The Cadbury Report, which laid the foundation for corporate governance reform in the UK, was
incorporated with subsequent reports into a Combined Code on Corporate Governance published in 1998. The Combined
Code has been revised several times and has been known as the UK Corporate Governance Code since 2009. 6 Since then,
the Code has been updated virtually every two years. The Code supplements statutory rules such as those contained in the
Companies Act 2006.

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It is a matter of curiosity that these corporate failures come against the background of such regular reforms. It is well known
that the UK has been at the forefront of *Comp. Law. 110 corporate governance reform in the world since the publication
of the Cadbury Report in 1992, which encourages listed companies to comply with the principles of the Code or explain why
they are not complying—known as "comply or explain". The number of companies supposedly complying with the Code has
been increasing since it was first published. Writing in 2018, Lowe revealed that 66% of the FTSE 350 complied with the
Code then, compared to 36% in 2002, when the first FTSE 350 Corporate Governance Review was launched. 7 So why
are companies failing despite corporate governance reforms? Or is it the case that companies will always fail and therefore
no amount of corporate governance reform could ever, even remotely, impact on the number of corporate failures however
effective such reforms might be? This paper examines the reasons for corporate failure vis-à-vis regulatory changes with the
view to determining the effectiveness of corporate governance reform in the UK. It is proposed to begin with a brief history
of corporate governance in the UK.

A brief history of UK corporate governance: From Cadbury to the UKCG Code 2016
A history of UK corporate governance is necessary here in order to provide a background for the ensuing discussion. However,
it is proposed to be brief as readers will presumably be all too familiar with the subject.

Following a series of high-profile corporate failures in the UK in the late 1980s and early 1990s, the private sector initiated a
series of reforms to improve transparency and accountability in corporate governance. The first was the Cadbury Committee
on the Financial Aspects of Corporate Governance set up by the London Stock Exchange, the Financial Reporting Council
(FRC)and accountancy professions to report on financial aspects of corporate governance. The committee published a report
in 1992 that came to be known as the Cadbury Report. The report recommended, among other things, a code of best practice to
be complied with by the board of listed companies as a condition of continued listing. 8 The Cadbury Report formed the basis for
future corporate governance reform in the UK and influenced the development of many corporate governance codes around
the world. Some of the reports published after Cadbury focused on specific aspects of corporate governance, all with the
overall objective of improving accountability and transparency in corporate governance. For example, the Greenbury Report
1995 focused on directors’ remuneration and their disclosure; the Hampel Report 1998 reviewed the implementation of the
Cadbury and Greenbury recommendations focusing on directors’ remuneration, the role of both executive and non-executive
directors as well as the role of shareholders and auditors in corporate governance; the Combined Code 1998 drew together
the recommendations of the Cadbury, Greenbury and Hampel Reports. The Turnbull Report 1999 provided guidance on the
implementation of the internal control requirements of the Combined Code. 9 The Higgs Review 2003 reported on the role
and effectiveness of non-executive directors; the Smith Review 2003, clarified the important role of the audit committee. The
revised Combined Code 2003 replaced the Combined Code issued by Hampel in 1998. 10 The Code incorporated the substance
of the Higgs and Smith Reviews. 11 The Combine Code was updated in 2006 and again in 2008 following an extensive review
by the FRC. 12 The 2008 Code introduced two changes to the 2006 Code which had itself introduced three main changes to
the 2003 Code. The Code, now known as the UK Corporate Governance Code, was further revised in 2010 and has been
updated every two years to ensure it stays relevant. 13 The most recent one is the UK Corporate Governance Code 2018—
the focus of this paper. The UK Corporate Governance Code has served as a benchmark for international best practice.

Reasons for corporate failings

As noted at the beginning of this paper, there has been a series of high-profile corporate collapses in the UK in recent years,
despite a regular review of the Corporate Governance Code. In fact, corporate governance reforms are largely a response
to these corporate failings going back to the Cadbury Code. Commonly cited reasons for corporate failure include fraud, 14
mismanagement, accounting irregularities, failure of the board to anticipate or address the risks facing the company, 15 economic
distress 16 and excessive remuneration of corporate executives. These reasons can be classified under the five main principles
of the Corporate Governance Code, suggesting a correlation between breach of the principles and corporate failure, and
raising questions about the level of compliance with the Code. It is proposed to *Comp. Law. 111 continue by examining three
of the above reasons—board failure, accountability, and directors’ remuneration—with the aid of empirical data, insofar as they
are covered by the principles of the Code. It is worth noting that these corporate governance principles are also supplemented
by legislation such as the Companies Act 2006. For example, directors’ general duties are covered in Pt 10, Ch.2. This is in
addition to directors’ specific duties which pervades much of the Act. Accounts and reports are covered in Pt 15, while Pt
15, Ch.6 of the Act imposes a duty on directors of quoted and traded companies to prepare a directors’ remuneration report,
a breach of which is a criminal offence.

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Board failure
The board of directors plays an important role in the governance of the company. It can be described as the nerve-centre of
the company. Among other things, it oversees the overall functioning of and provides direction for the company in virtually
every area of corporate life. 17 It is perhaps for this reason that the Code pays more attention to the board than to other areas
of corporate governance. In fact, the board is charged with the responsibility of applying all the five principles of the Code
ranging from leadership to remuneration in the case of the 2018 Code and leadership to relations with shareholders in the case
of the 2016 Code. Unsurprisingly, when things go wrong for the company, the board is often to blame.

Board failure has often been identified as a major reason not only for corporate collapses such as Enron and Carillion, 18 but
also for failings in the banking sector. For example, Hannigan reveals that following the financial crisis in 2008, Her Majesty’s
Treasury concluded that failure by the board to probe and understand their firms’ risk management processes, poor management
decisions, among others contributed to the crisis. Similarly, the European Commission observed that board failure to ultimately
control "the risks to which their financial institutions were exposed lay at the heart of the origins of the crisis". 19 More recently,
a report by the business, energy and industrial strategy (BEIS) and work and pension on the collapse of Carillion, blamed "greed
among the company’s board members and a rotten corporate culture". 20 The collapse of Carillion led to claims that the board
failed to adequately manage the company’s risk by allowing it to take high debts while trading on low margins and that the
board also failed to grasp the company’s contract risk management. 21

The UK Corporate Governance Code emphasises the importance of the company being governed by an effective board
of directors that is responsible for the long-term success of the company. This principle, like many corporate governance
principles, has its roots in the Cadbury Report which recommended that the board be split between executive directors and
non-executive directors to make it more effective and that the non-executive directors (NEDs) be appointed by the board rather
than senior management in order to ensure their independence. The role of executive directors and NEDs was reviewed by
the Greenbury Committee and emphasised in the subsequent Codes. For example, the Main Principles of Section A1 (which
defines the role of the board) of the 2012, 2014 and 2016 Codes provides that "every company should be headed by an effective
board which is collectively responsible for the long-term success of the company". The Main Principle of section A.4, which
deals with the role of NEDs, encourages them to effectively challenge and help develop proposals on strategy.

It is clear that board effectiveness and accountability are important principles in the Corporate Governance Code. Principle C2
of the 2016 Code which is replicated as Principle O of the 2018 Code requires the board to maintain sound risk management and
internal control systems. Following the collapse of Carillion, the head of governance at the institute of directors said "effective
governance was lacking at Carillion." 22

An empirical analysis of board failure: Surface compliance to conceal in-depth defiance?

It is a matter of curiosity that board failure or the lack of board effectiveness should be a major reason for corporate collapse,
when generally speaking, the corporate world has always been receptive to corporate governance reform in the UK and seem
to be complying with the provisions of the Corporate Governance Code as seen above. Following the financial crisis in 2008,
Hannigan observed that "on paper, looking at the domestic United Kingdom banking defaulters and failures, such as Northern
Rock, HBOS, and Royal Bank of Scotland, all had boards with the obligatory mix of executive and non-executive directors,
all had remuneration, audit and nomination *Comp. Law. 112 committees, all operated in compliance with respected Codes
of corporate governance, as their annual reports confirmed. But the reality, as HM Treasury concluded, "was widespread
corporate governance failures by these boards, particularly in understanding and probing their firms’ risk management
processes." 23 The European Commission considered that the failure of boards to identify, understand and ultimately control
the risks to which their financial institutions were exposed lay at the heart of the origins of the crisis.

On paper, these organisations had complied with the provisions of the Corporate Governance Code, the Stewardship Code
and other regulatory instruments largely by ticking the boxes. However, the reality was different. In many cases, companies
went into insolvency after the publication of glowing reports about their performance. For example, in its 2016 annual report
Carillion noted that the evaluation had "confirmed that the board, each of its committees and the directors continue to be
highly effective." 24 One year after the publication, the company collapsed with board failure at least partly to blame despite

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its experience. 25 This raises the question of why companies that are said to have complied with the principles of the Code are
found to have compliance issues after they collapse.

As is well known, the Code offers flexibility in implementation and operates on a "comply or explain" basis. Comply or explain
means that listed companies may either comply with the principles and guidelines of the Code or explain why they have not
complied. The flexibility offered in the implementation of the Code means that in many cases, companies choose to comply
with the principles by ticking the box. But box-ticking has its problems. The paradox is that box-ticking which focuses on
complying with the letter of the Code is an offshoot of the much-vaunted flexibility offered by the FRC 26 to companies as
a way of applying the spirit of the principles. In other words, the FRC believed that flexibility would enable companies to
comply with the spirit of the principles. However, flexibility had the opposite effect of enabling companies to adopt the box-
ticking approach and comply with the letter of the principles only. Paradoxically, this is a realisation of Cadbury’s fears, when
expressing his preference for a voluntary code, that statutory measures would impose a minimum standard and there would be a
greater risk of boards complying with the letter rather than the spirit of their requirements. 27 As argued elsewhere, box-ticking
amounts to surface compliance as the company is only concerned with applying the letter of the Code, whereas compliance is
in-depth when the company applies the spirit of the Code. 28 It is significant that in the 2018 Code, the FRC advocated the
use of high-quality reporting on the provisions of the Code in the application of the principles, cautioned companies against
box-ticking and again reiterated the importance of applying the spirit of the Code. This shows an awareness of the prevailing
corporate practice of box-ticking and compliance with the letter rather than the spirit of the Code.

A robust monitoring mechanism to ensure real compliance with the Code might have prevented this situation where companies
inaccurately reported compliance with the provisions of the Code. This reflects the failure by companies to implement the spirit
of the Code despite ostensibly welcoming corporate governance reforms.

Inaccurate accounting
Accounting is an important element in the Corporate Governance Code. It has featured prominently as one of the main
corporate governance principles going back to the Cadbury Report. One of the recommendations of Cadbury was that directors
should make a statement in the report and accounts on the effectiveness of their system of internal control and that the auditors
should report thereon. 29 As mentioned earlier, the Code complements and in many instances reinforces existing statutory duties
imposed on directors. For example, Cadbury reiterates the need for directors to maintain a system of internal control over the
financial management of the company in order to meet their responsibilities under Pt 15, Ch.2 of the Companies Act 2006. 30

An empirical analysis of inaccurate accounting

Unfortunately, inaccurate accounting, lack of internal controls and misleading audit caused by a limited remit of auditors have
often been cited as major reasons for the collapse of many companies. This suggests that the provisions of the Code in relation
to accounting are not fully complied with. For example, the failure of a company to adequately manage its risk and handle
annual reporting and accounts could be said to be a breach of section C of the 2016 Code which contains three main principles
of accountability. The main principle for section C.1 requires the board to present a fair, balanced *Comp. Law. 113 and
understandable assessment of the company’s position and prospects. Section C is reproduced in an abridged form as section 4
of the 2018 Code entitled "Audit, Risk and internal Control". The three main principles for section C.1 are listed as principles
M, N, and O in the 2018 Code. The main principle for C.1 is reproduced as principle N, while principle O requires the board
to establish procedures to manage risks, among others in other to achieve the company’s long-term strategic objective.

Of the reasons cited for the corporate failure, misleading audit appears to play a lead role as an accurate audit will pick up
deficiencies in accounting and internal control systems. At a launch of a new inquiry examining the future of audit in November
2018, the Chair of the Business, Energy and Industrial Service Committee, Honourable Rachel Reeves said the audit market
is broken. She said:

"Misleading audits have been at the heart of corporate failures over recent decades. Recent accounting scandals at BHS,
Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate
reflection of the true financial performance of the business. Repeated accounting failures have contributed to the collapse of
major businesses and undermined public and investor confidence." 31

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A common example of accounting failures is where the company’s account is signed off prior to it going into insolvency. EY,
the new auditors for Thomas Cook, signed off the company’s last set of accounts for 2018 prior to it becoming insolvent in
September 2019. 32 Such practices commonly arise where the company uses the same firm of auditors for many years. In
addition to giving rise to feelings of loyalty, this practice can gradually compromise the independence and objectivity of the firm
and could eventually lead to the auditors being found complicit with the failed company. Such was the case with Carillion, which
bears a striking similarity with the case of the failed US company, Enron, and its firm of accountants, Arthur Anderson, both
of which collapsed at the turn of the millennium. The same accusation of auditors’ complicity in Thomas Cook’s downfall was
levied against PwC, auditors of Thomas Cook and EY the firm which replaced PwC in 2017. A parliamentary inquiry into the
collapse of the company found that Thomas Cook paid PwC up to £21 million in consultancy fees between 2007 and 2016. 33

According to another parliamentary report 34 on the collapse of Carillion, the FRC first raised concerns about the company’s
future in 2015 while conducting a regular review of the company’s account. 35 "The FRC highlighted 12 potential problems
with Carillion’s books, ranging from a lack of clarity in goodwill assumptions to a non-existent explanation on the major decline
in Carillion’s book-to-bill ratio" and gave warnings of a potential profit shortfall. 36 Yet the company’s account continued to be
signed off until March 2017, when Carillion itself issued profits warnings. 37 The company went into liquidation less than a year
later in January 2018 with debts of £1.5 billion. The board’s insufficient handling of annual reporting and accounts was seen as
a major reason for the company’s collapse. The parliamentary report raised questions about the independence and objectivity
of KPMG, Carillion’s auditor, given that they were the company’s auditors for all 19 years of its existence from 1999, although
it noted that this was within the 20-year statutory maximum period within which companies must change their auditors. 38 In
a critical statement, the report stated that:

"KPMG audited Carillion for 19 years, pocketing £29 million in the process. Not once during that time did they qualify their
audit opinion on the financial statements, instead signing off the figures put in front of them by the company’s directors. Yet,
had KPMG been prepared to challenge management, the warning signs were there in highly questionable assumptions about
construction contract revenue and the intangible asset of goodwill accumulated in historic acquisitions. These assumptions were
fundamental to the picture of corporate health presented in audited annual accounts. In failing to exercise and voice professional
scepticism towards Carillion’s aggressive accounting judgements, KPMG was complicit in them." 39

It is clear that accounting failures contribute to corporate failures. Perhaps it is in recognition of this link and its importance that
measures are being introduced to improve the quality of accounting and auditing. For example in July 2019, the FRC proposed
to issue new, revised ethical standards with effect from 15 December 2019. This follows a consultation on revisions to ethical
and auditing *Comp. Law. 114 standards which was issued in July 2019. 40 In December 2018, the government appointed
Sir Donald Brydon to conduct a review into the quality and effectiveness of audits. 41 The Brydon Report was submitted in
December 2019.

Accurate accounting requires transparency in financial records, which was absent in Carillion’s case. Inaccurate accounting
could result from negligence or corruption and in either case the company directors should be held accountable. As observed
by Schipani, accountability is an obligation of corporate directors and officers to be held responsible for their actions, and is
inherently related to transparency measures. 42 But to meet this obligation, there must be mechanisms fostering transparency
and disclosure. 43 Indeed, the FRC concluded in its audit quality review inspection reports for 2018/19 that 25% of assessed
audits fall below acceptable standards. Findings of the report include the possible factors responsible for audit teams failing
to challenge company management sufficiently. 44 However, things are likely to change with the proposed replacement of the
FRC with a new body, the Audit, Reporting and Governance Authority (ARGA), which will introduce a new sanction regime
of auditors and directors.

Directors’ remuneration
Directors’ remuneration has been one of the most controversial corporate governance issues in the past three decades.
Regulators have sought to resolve this thorny issue by introducing more disclosure requirements through corporate governance
rules and company law with the effect of giving shareholders a role on directors’ remuneration. Shareholders in the UK
have been entitled to an advisory vote on directors’ remuneration since 2002. 45 This is intended to enable them to influence
directors’ remuneration and give them a role in corporate governance. The question will be examined later as to whether

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shareholders have exercised this right and, if so, whether this has had an impact on the thorny issue of directors’ remuneration.
The Corporate Governance Code provides clear guidelines on directors’ remuneration. Principle P of the 2018 Code requires
remuneration policies to promote long-term sustainable success and directors’ remuneration to be clearly linked to the successful
delivery of the company’s long-term strategy. Principle R requires directors to take account of the company and individual
performance as well as wider circumstances when authorising remuneration outcome. Provision 40 of the Code recommends
that the remuneration committee should engage with shareholders and the workforce when determining executive director
remuneration policy. The 2018 Code echoes earlier codes such as the Greenbury Report which recommended that remuneration
should be linked explicitly to performance.

As with accounting rules, the Code’s provisions on directors’ remuneration complements statutory rules. For example, the
Principle P requirement to promote the long-term success of the company replicates the duty of directors under s.172 of the
Companies Act 2006. The Provision 40 recommendation to engage with shareholders mirrors further provisions of the 2006
Act. For example, s.420 of the Act imposes a duty on directors of quoted companies to prepare a directors’ remuneration report.
Under s.423, a copy of the annual accounts and report must be circulated to shareholders and other stakeholders. 46 Over the
years, the government has introduced additional reporting requirements to encourage companies to be more transparent about
directors’ remuneration. Examples include the Directors’ Remuneration Reporting Regulations 2013 which brought in new
rules giving shareholders a binding vote on directors’ remuneration. 47 A more recent example is the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008, 48 which have been amended recently by the Companies
(Directors’ Remuneration Policy and Directors Remuneration Report) Regulation 2019 to extend the scope of remuneration
reporting to unquoted traded companies and to introduce new requirements in respect of directors’ remuneration policy and
remuneration report. 49 The Regulations implement arts 9a and 9b of the European Directive 2017/82/EC, commonly known
as the Revised Shareholder Rights Directive. 50 They apply to company reporting on financial years starting on or after 10
June 2019. *Comp. Law. 115

These provisions give shareholders rights over directors’ remuneration. As seen below, shareholders have recently been
exercising these rights as corporate failures have brought corporate governance issues such as directors’ remuneration to the
limelight. These instruments have heightened disclosure requirements by, inter alia, removing the board’s former discretion in
respect of holding a vote and giving shareholders a voice on directors’ remuneration. 51 In short, the rules require companies
to put their remuneration policies to a binding shareholder vote at their AGM. 52 However, the question as to whether statutory
rules have succeeded in aligning directors’ remuneration and corporate performance has, generally, been answered in the
negative. 53 In fact, some commentators take the view that disclosure has had the opposite effect of raising the level of directors’
remuneration. According to Howard, Greenbury’s disclosure requirements helped raise average pay by revealing peer earnings,
and companies were not presenting pay reports to shareholders for approval. 54

An empirical analysis of directors’ remuneration: Link with performance

Empirical data suggest that the requirement that directors’ remuneration should be linked to performance has not always been
observed in the corporate world and examples abound where directors receive excessive pay rises or huge bonuses when their
companies are in financial crises and sometimes lay off employees. A recent example makes the point. In November 2019,
shareholders of Kier Group plc, a leading UK construction and infrastructure services company, revolted over the company’s
plan to pay its CEO more than £1 million in bonuses despite disastrous profit warnings and a plunging share price. 55 Kier
is reported to have paid its board a total of £2.1 million in the year to June 2019, when the company reported losses of £245
million. Although the £2.1m payment was a significant drop from the £5.5 million paid the year before, as the company did
not pay any bonuses in 2018–19, it came against a 90% drop in shares reflecting a fall in its market value from £1 billion to
£200 million during the same period. 56 At the same time, the company also planned to lay off 1,200 employees by June 2020,
that is over 6% of its workforce. The recent developments at Kier are a chilling echo of the events that heralded the collapse
of Carillion. They are a familiar tale of many public companies that have gone into liquidation in the UK and carry the tell-
tale signs of a company heading in the Carillion direction.

The link (or lack of a link) between pay and performance has fuelled the controversy surrounding directors’ remuneration. In
2004, the Chair of Treasury Select Committee criticised the CEO of large insurance companies following an executive pay
increase of 45–70% after a period of a decline in profitability, 50% drop in share prices, 25% loss of endowments saying:
"the industry is going down like a slalom skier … why do you think you are worth so much?" 57 The increase has continued

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over the years. In a discussion paper on executive remuneration published in September 2011, the Department for Business
Innovation and Skills, now the Department for Business, Energy and Industrial Strategy (BEIS) revealed that the average total
pay of FTSE 100 CEOs for the period 1998–2010 rose 13.6% year from an average of £1 million to £4.2 million. 58 This rise in
pay far exceeded the 1.7% average annual increase in the FTSE 100 index as well as the average remuneration levels for other
employees for the same period. During the same period, UK employee pay only grew by 4.7%, lifting the multiple of CEO pay
from 47 times average worker pay to a multiple of 120. 59 And, in 2014, the average UK CEO remuneration was estimated to
be 125 times more than the average earnings of an employee. 60

Jenkins observes that while there was an astronomical 330% increase in executive pay between 1998 and 2015, average wages,
worth £28,000 in 2015 rose only about 12% in real terms during the same period. 61 As mentioned earlier, the 2018 Code now
requires, in provision 33, that the remuneration committee reviews workforce *Comp. Law. 116 remuneration and take it into
account when setting the policy for executive directors’ remuneration. Furthermore, the Companies Regulation 2019 now also
requires a comparison of the annual change of each director’s pay to the annual change in average employee pay over a five-
year period in traded companies. 62

The former Department for Business, Innovation and Skills observed that while CEO remuneration rose rapidly in the period
above, the link between pay and performance was hard to discern. 63 One reason is that the complexity of reports means
that in some cases, the symmetry between remuneration, shareholder return and the long-term objectives of the company is
lost. 64 Research reveals that only around a third of the remuneration reports of the FTSE 150 companies clearly disclosed how
remuneration is dependent on performance. 65

Shareholder activism over directors’ remuneration

The problem of directors’ excessive remuneration has led to an increase in shareholder activism in recent years, apparently to
enforce the rights provided to them in regulatory instruments such as those examined above. There has been a resurgence of
shareholder interest in the corporate decision-making process relating in particular to director’s remuneration. This renewed
interest has revitalised corporate democracy. In July 2018, Institutional Shareholder Services and Glass Lewis, the world’s
largest and most influential proxy advisers advised shareholders of Royal Mail to reject its plan to pay its new CEO a
higher salary than that of his predecessor. 66 In May 2019, investors protests over huge remuneration packages and pension
contributions led to a pay cut of the CEO of Standard Chartered and the resignation of the CEO of Smith & Nephew. 67
Similarly, in the same month, in one of the biggest rebellions at a FTSE 100 company hitherto, 42% of shareholders at Standard
Life Aberdeen, the £546 billion UK asset manager, protested against the pay of a senior executive and voted against the fund
house’s remuneration report. 68 This is even below the 53.9% of Kier Group shareholders who rejected the pay report of the
company’s directors a few months later in November 2019. 69 The rejection came despite the fact that the total pay was down
to £2.1 million from £5.5 million the year before. 70 Still in November 2019, Britain’s most influential investor group, The
Investor Association, warned the country’s biggest companies to address excessive and opaque executive pay deals or face
shareholder scrutiny during the 2020 AGM season. 71 Investors would like to see a greater alignment of pay with long-term
company strategy in 2020, a recommendation of the Code. Protesting investors have generally expressed similar concerns that
remuneration is geared at short rather than long-term performance and that it exceeded UK market norms.

The impact of shareholder activism on directors’ remuneration

The question that arises is whether recent shareholder activism over directors’ remuneration is having an impact. Reports
indicate that despite the increase in shareholder rebellion, there has been a trend of increased remuneration of non-executive
directors and chair in 2019. 72 And, executive pay is even higher. 73 The average pay of chairpersons of the UK’s largest
companies is said to have risen by almost a third to more than £400,000 since *Comp. Law. 117 the end of the financial crisis.
According to the Spencer Stuart Board Index, which analyses the boardrooms for the largest companies with a premium listing
on the London Stock Exchange, a major reason for the increased remuneration is that boards have become more professional
in the last decade. 74 However, as pointed out by what was formerly BIS, research on the reasons for the growth in pay has
reached different conclusions, with many studies pointing to the difficulty of identifying causal effects. "As a result, no single,
clear reason has emerged and the trend is likely to be a combination of factors". 75

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Despite the recent incidents of shareholder activism described above, it is worth noting that incidents of shareholder activism
are still very negligible and, overall, remuneration reports receive shareholder approval. It has been seen above that companies
are legally required to put their remuneration policy to the vote in the AGM. In its recent report, the Chartered Institute for
Professional Development (CIPD) observed that between 2014 and 2018 every single FTSE 100 remuneration policy put to the
vote at an AGM was approved by shareholders. 76 According to the analysis, most remuneration packages received more than
90% vote and despite the reported incidents of shareholder protests, no remuneration reports were defeated in 2019 and only six
pay packages were defeated between 2014 and 2018. 77 Recently, a review carried out by Sir John Kingman on the FRC noted
that investors are not as engaged, particularly in audit and accounting issues, as they should be. 78 The conclusion that can be
drawn so far is that although shareholders’ right in respect of directors’ remuneration have been strengthened by regulatory
framework and there have been incidents of shareholder activism recently, shareholder apathy is still a major issue overall.

An agency theory justification of directors’ remuneration

So far, we have analysed the seemingly perennial issue of directors’ remuneration with the aid of regulatory instruments and
empirical data. However, the analysis would be incomplete without a brief reference to corporate legal theory. In fact, the
controversy surrounding directors’ remuneration makes such a reference not only appealing but compelling, perhaps the most
compelling corporate governance issue. Nevertheless, a detail discussion of corporate law theory is beyond the scope of
this article and it is certainly not intended to revisit the Berle and Means thesis on the separation of ownership and control
which sparked the Berle and Dodd debate of the 1930s. The discussion of directors’ remuneration reveals a conflict between the
interests of shareholders who personify ownership of the company and directors who personify management of the company.
This conflict arises from an agency relationship which Jensen and Meckling define as a form of contract between shareholders
and directors. 79 The conflict is a practical reflection of the agency theory of the firm, a theory which deals with the relationship
between the shareholders and the directors. A corollary of the agency theory is the agency cost theory, that is, the cost that
shareholders incur by having managers run the company on their behalf. The requirement that executive pay should be linked
with performance is significant in this regard. Where pay is linked with performance, this can be seen as a justifiable agency
cost that shareholders incur by having directors run the company on their behalf.

The friction between directors and shareholders as revealed in the analysis above is a reflection of the intricacies of the
theory. And, agency theory is based on the view that the corporate governance system as seen in the regulatory frameworks
examined above, (which essentially require directors to promote the success of the company for the benefit of the members as
whole) is designed to minimize the agency problem 80 and reduce agency cost. But problems arise where directors, as agents,
take decisions which are perceived not to be for the benefit of the shareholders, as principals. Indeed, much mistrust on the
reliability or trustworthiness of agents such as directors has been expressed in the literature. According to Williamson, agents
are ‘opportunistic actors given to self-interest seeking with guile’. 81 Some commentators have proposed the introduction of an
effective mechanism in the governance system needed to align the agent’s interest with those of the principal otherwise directors
will have no incentive to maximise the interests of shareholders. 82 According to Coffee improved accountability "improves
the behaviour *Comp. Law. 118 of most individuals". 83 It seems that no other corporate governance issue epitomises this
conflict more than directors’ excessive remuneration. This is more so where the remuneration is perceived not to be linked with
performance. Excessive remuneration could come under one of many forms of what La Porta et al. describe as "expropriation
of minority shareholders and creditors by the controlling shareholders" 84 . This is a corollary of the agency problem described
by Jensen and Meckling, and means that insiders use the profits of the firm to benefit themselves rather than return the money
to the outside investors. According to La Porta et al who take a cynical view of insider motives, when the legal system provides
good protection for investors, one of the few options that insiders can resort to is to overpay themselves. 85

On reflection, empirical evidence on directors’ remuneration bear the hallmarks of the agency theory more than any other
corporate theory. As the preceding analysis reveals, despite regulatory reform both in the form of soft law and hard law to
ultimately reduce agency costs, directors’ remuneration has continued to rise, overall, and shareholders have continued to
approve remuneration packages in the AGM. The surprising approval by shareholders of directors’ remuneration packages in
the midst of controversies over directors’ pay underlines the fact that whatever hype directors’ remuneration may cause, the
subject is a contractual one to be determined ultimately by the parties to the contract in pursuit of their respective interests.
External regulation has a limited intrusive force. It can only provide a framework within which the parties to the agency contract
can exercise their contractual rights in pursuit of their respective interests, but ultimately the decision is theirs. And, in this

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contract, shareholders as principals, almost invariably exercise their contractual and statutory rights to vote in favour of the
remuneration packages presented to them in the AGMs by their agents, the directors. What then is the fuss, one might ask?

The FRC itself acknowledges that despite increasing regulation to improve transparency and accountability, the inconsistent
alignment between executive remuneration and performance and between the remuneration of senior executives and employees
has continued unabated. 86 This acknowledgement underscores the agency theory basis of directors’ remuneration and the
limited effect that external regulation can have in this area of corporate governance.

Conclusion
Corporate governance issues are perennial and they will remain so for as long as companies continue to fail. Moreover,
companies will sometimes fail as admitted by the Kingman Review. 87 Corporate failure cannot therefore, be interpreted as
a sign of corporate governance failure. What is certain, however, is that corporate failure provokes corporate governance
reform. Most of the corporate governance reforms in the UK, both in the form of soft law and hard law, have been in response
to these corporate failures. If anything, this paper has revealed that the UK corporate world is hardly a dull or an idle place.
It is a vibrant beehive that is reverberating with a near-incessant flurry of corporate governance reforms matched equally by
corporate failures and the concomitant fallouts. In fact, some of the reforms and corporate activities discussed in this paper
took place while the paper was being written. One might be tempted to ask if the reforms are working, but that is another subject.
The following passionate statement made by Rachel Reeves MP, to a session of auditors facing the Commons Business, Energy
and Industry Strategy (BEIS) Committee in October 2019 captures the theme:

"How many more company failures, how many more egregious cases of accounting do we need? We've had BHS, Carillion
and Patisserie Valerie, and now we've had Thomas Cook. How many more do we need before your industry opens its eyes
and recognises that you're complicit in all of this and you need to reform? I think the conclusion policy makers will take from
today is that we can’t rely on you to do the right thing and legislation is needed to have a tougher regulator. We need tougher
regulation because your industry is not willing to make the changes needed." 88

A question that is worth asking is if the above statement and the replacement of the FRC with ARGA is an admission that
industry self-regulation has failed and if this gives credence to the argument that industry cannot be trusted to self-regulate.
This too, is another subject.

The three corporate governance issues examine in this paper underpin the fact that by virtue of its inter-disciplinary nature,
corporate governance intersects various subject areas including law (both soft law and hard law) and corporate legal theory,
all supported by empirical data. It was seen above that the problem of directors’ remuneration is best explained by the agency
theory. However, it can be surmised from the analysis in this paper that, overall, corporate governance is a nexus *Comp.
Law. 119 of contracts involving an intense interplay between the various stakeholders involved in this giant, invisible and
amorphous entity called the company. As seen earlier, the agency theory provides a suitable theoretical home for the issue of
directors’ remuneration which essentially involves a contract between the directors and shareholders. This contract is a part of
the bigger nexus of contracts upon which the company is thought to be based. 89 The above speech by Honourable Reeves to
the session of auditors at the Commons Committee is an indictment on auditors that they have failed to perform their role in
the contract between them and the company—a contract which is yet another part of the bigger nexus of contract. It follows
that corporate governance reform often involves separate regulatory instruments dealing with these separate contractual
relationships which weaved together provide an effective system of governance. For example, as seen earlier, the Companies
(Directors’ Remuneration Policy and Directors Remuneration Report) Regulation 2019 deals with directors’ remuneration
which concerns the agency relationship between shareholders and directors. The Statutory Auditors, Third Country Auditors and
International Accounting Standards (Amendment) (EU Exit) Regulations 2019 deal with auditors, which concerns the agency
contract between the company and the auditors. Only occasionally is there a single regulatory framework such as the Code
or the Companies Act 2006, which deals with all or most of the parties in this nexus of contract and the issues involved. And
even then, a perusal of the instruments would reveal that they carry the hallmarks of the nexus of contract theory. For example,
the main principles of the Code deal with different contracts, such as the contract between the shareholder and the directors,
the contract with the auditors, etc.

Dr Edwin Mujih

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Footnotes

1 This paper was presented as a working paper at the 17th International Conference on Corporate Social
Responsibility organised by the Social Responsibility Research Network in Bangalore, India in September
2018. I am grateful to London Metropolitan University for retrospectively funding my participation at the
conference and in particular to Professor Klaus Fischer for his help in obtaining the funding.
2 Lucy Burton, "Number of British Businesses Going Bust Hits Four-year High" The Telegraph, 26 January
2018, https://www.telegraph.co.uk/business/2018/01/26/number-british-businesses-going-bust-hits-four-year-
high/ [Accessed 13 August 2018].
3 The Insolvency Service, Company insolvency statistics, Q4 October to December 2019, Released 30 January
2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/861187/Commentary_-_Company_Insolvency_Statistics_Q4_2019.pdf p.7 [Accessed 25 April 2020].
See also, http://www.gov.uk/government/collections/insolvency-service-official-statistics; and https://
www.telegraph.co.uk/business/2018/01/26/number-british-businesses-going-bust-hits-four-year-high/ [Both
accessed 13 August 2018].
4 The Insolvency Service, Company insolvency statistics, Q4 October to December 2019, Released 30 January
2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/861187/Commentary_-_Company_Insolvency_Statistics_Q4_2019.pdf, p.8 [Accessed 25 April 2020].
5 The Insolvency Service, Company insolvency statistics, Q4 October to December 2019, https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/861187/
Commentary_-_Company_Insolvency_Statistics_Q4_2019.pdf, p.3 [Assessed 25 April 2020].
6 Independent Review of the Financial Reporting Council (December 2018), https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-
independent-review-final-report.pdf [Accessed 10 February 2021].
7 Simon Lowe, "How Will the Revised UK Corporate Governance Code Affect You?" (25 July 2018) Grant
Thornton, https://www.grantthornton.co.uk/insights/how-will-the-revised-uk-corporate-governance-Code-
affect-you/ [Accessed 13 August 2018].
8 Report of the Committee on The Financial Aspects of Corporate Governance (1 December 1992) https://
ecgi.global/sites/default/files/codes/documents/cadbury.pdf, para.1.3 [Accessed 10 February 2021]. See also,
Stephen Griffin, Company Law: Fundamental Principles, 4th edn. (London: Pearson Education, 2006), p.365.
9 Christine Mallin, Corporate Governance, 5th edn. (Oxford: OUP, 2016), p.31.
10 Griffin, Company Law: Fundamental Principles (2006), p.368.
11 Mallin, Corporate Governance (2016), p.33.
12 The FRC is responsible for setting the UK’s Corporate Governance and Stewardship Codes and also for
regulating auditors, accountants and actuaries.
13 Mallin, Corporate Governance (2016), pp.28 and 35.
14 Nash Riggins reveals that a US Senate investigation into the role of Enron’s board in its collapse in 2001
found that the directors were inexperienced, and the board riddled with conflicts of interest and breach of
fiduciary duties. Nash Riggins, "10 Reasons for Corporate Failure" (29 March 2019) Financial Director,
https://www.financialdirector.co.uk/2019/03/29/10-reasons-for-corporate-failure/ [Accessed 3 July 2019].
15 Brenda Hannigan: "Board failure in the financial crisis—Tinkering with Codes and the need for wider
Corporate Governance Reforms: Part 1" (2011) 32 The Company Lawyer 12, 363, 364. Paul Hopkins
reveals that a research commissioned after the global financial crisis 2008 found that corporate failures are
usually the result of poor risk management by boards of directors. Paul Hopkin, "Understanding the Causes
of Corporate Failure" (1 February 2012) FM, https://www.fm-magazine.com/issues/2012/feb/understanding-
causes-of-corporate-failure.html [Accessed 3 July 2019].
16 Business Jargons, "Corporate Failure", Business Jargons, https://businessjargons.com/corporate-failure.html
[Accessed 19 August 2019].
17 For example, in a 62-page report published in 2016 entitled "Corporate Culture and the Role of Boards: Report
of Observations", the FRC elaborated on the importance of the role played by the board in influencing and
shaping the corporate culture. In the report, the FRC stated that strategy to achieve a company’s purpose
should reflect the values and culture of the company and should not be developed in isolation. It charged the

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board with the responsibility of overseeing this strategy. FRC, "Corporate Culture and the Role of Boards
—Report of Observations" (July 2016), https://www.frc.org.uk/getattachment/d246eacb-5774-4912-98e1-
c03f1c8f692f/Corporate-Culture-and-the-Role-of-Boards-Report-of-Observations-tagged.pdf, p.3 [Accessed
10 February 2021].
18 Nash Riggins, "Top Corporate Scandals in 2018" (19 March 2019) https://
www.financialdirector.co.uk/2019/03/19/top-corporate-scandals-in-2018/ [Accessed 1 July 2019].
19 Brenda Hannigan, "Board failures in the financial crisis—Tinkering with Codes and the need for wider
corporate governance reforms: Part 1" (2011) 32 Company Lawyer 363.
20 Caitlin Morrison, "MPs blast Carillion bosses and Big Four accountancy firms for part in outsourcer’s
collapse" Independent, 16 May 2018, https://www.independent.co.uk/news/business/news/carillion-collapse-
latest-big-four-pwc-ey-kpmg-deloitte-a8352886.html [Accessed 10 February 2021]; News: Construction
Europe, October 2018.
21 Riggins, "Top Corporate Scandals in 2018" (19 March 2019) https://www.financialdirector.co.uk/2019/03/19/
top-corporate-scandals-in-2018/ [Accessed 1 July 2019].
22 Josie Cox, "Carillion collapse—as it happened: Government and unions react as major NHS contractor enters
liquidation" Independent,15 January 2018, https://www.independent.co.uk/news/business/news/carillion-
liquidation-live-updates-latest-updates-hs2-nhs-contractor-high-speed-2-construction-a8159411.html [Accessed
10 February 2021].
23 Hannigan, "Board failure in the financial crisis—Tinkering with Codes and the need for wider Corporate
Governance Reforms: Part 1" (2011) 32 Company Lawyer (12) 363, 363.
24 Sacha Sadan, "Carillion’s collapse exposes deep corporate governance failings" Financial Times, 14 February
2018, www.ft.com/content/1958fb80-0fe6-11e8-940e-08320fc2a277 [Accessed 13 August 2018].
25 Kate Burgess, "Carillion’s board: Misguided or incompetent?" Financial Times, 17 February 2018, https://
www.ft.com/content/2095beca-fb8b-11e7-a492-2c9be7f3120a [Accessed 5 May 2020].
26 FRC, The UK Corporate Governance Code, July 2018, https://www.frc.org.uk/
getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf,
p.1 [Accessed 10 February 2021].
27 FRC, Report of the Committee on the Financial Aspects of Corporate Governance, (1 December 1992)
(hereafter Cadbury Report)https://www.frc.org.uk/getattachment/9c19ea6f-bcc7-434c-b481-f2e29c1c271a/
The-Financial-Aspects-of-Corporate-Governance-(the-Cadbury-Code).pdf, para. 1.10 [Accessed 10 February
2021].
28 Edwin Mujih, "Do not simply tick the box: The effectiveness of the Corporate Governance Code 2018 in the
absence of an implementation mechanism" Company Lawyer, forthcoming.
29 Cadbury Report, para.4.32.
30 Cadbury Report, para.4.31.
31 "BEIS Committee Examine the Future of Audit", Parliament, 12 November 2018, https://www.parliament.uk/
business/committees/committees-a-z/commons-select/business-energy-industrial-strategy/news-
parliament-2017/future-of-audit-inquiry-launch-17-19/ [Accessed 25 November 2019]. See also; Riggins, "Top
Corporate Scandals in 2018" (19 March 2019) https://www.financialdirector.co.uk/2019/03/19/top-corporate-
scandals-in-2018/ [Accessed 1 July 2019].
32 Wale Azeez, "Auditors ‘Complicit’ in UK Corporate Failures" Sky News, 23 October 2019, https://
news.sky.com/story/auditors-complicit-in-uk-corporate-failures-mps-say-11842171 [Accessed 11 February
2021].
33 Azeez, "Auditors ‘Complicit’ in UK Corporate Failures" 23 October 2019, https://news.sky.com/story/
auditors-complicit-in-uk-corporate-failures-mps-say-11842171 [Accessed 27 November 2019].
34 Parliament, https://publications.parliament.uk/pa/cm201719/cmselect/
cmworpen/769/76906.htm#_idTextAnchor110. [Accessed 17 July 2019].
35 Riggins, "Top Corporate Scandals in 2018" (19 March 2019) https://www.financialdirector.co.uk/2019/03/19/
top-corporate-scandals-in-2018/ [Accessed 1 July 2019].
36 Riggins, "Top Corporate Scandals in 2018" (19 March 2019) https://www.financialdirector.co.uk/2019/03/19/
top-corporate-scandals-in-2018/ [Accessed 1 July 2019].
37 Parliament, https://publications.parliament.uk/pa/cm201719/cmselect/
cmworpen/769/76906.htm#_idTextAnchor110. [Accessed 17 July 2019]. See also, Riggins, "Top Corporate
Scandals in 2018" (19 March 2019) https://www.financialdirector.co.uk/2019/03/19/top-corporate-scandals-
in-2018/ [Accessed 1 July 2019].

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38 Parliament, https://publications.parliament.uk/pa/cm201719/cmselect/
cmworpen/769/76906.htm#_idTextAnchor110. [Accessed 17 July 2019].
39 Parliament, https://publications.parliament.uk/pa/cm201719/cmselect/
cmworpen/769/76906.htm#_idTextAnchor110. [Accessed 17 July 2019].
40 "Corporate Governance in the UK" Spencer Stuart, November 2019, https://www.spencerstuart.com/research-
and-insight/corporate-governance-in-the-uk [Accessed 25 November 2019].
41 "Gov’t takes next step in improving Standard of UK Audit Market with new Independent Review into
Audit Standards" 18 December 2018, https://www.gov.uk/government/news/government-takes-next-step-in-
improving-standards-of-uk-audit-market-with-new-independent-review-into-audit-standards [Accessed 25
November 2019]. See also https://www.spencerstuart.com/research-and-insight/corporate-governance-in-the-
uk [Accessed 11 February 2021].
42 Cindy Schipani, "The role of Corporate Governance in promoting integrity and addressing corruption" (2014)
35(5) Company Lawyer 1332.
43 Schipani, "The role of Corporate Governance in promoting integrity and addressing corruption" (2014) 35(5)
Company Lawyer 1332.
44 "Review into financial services regulatory framework launched" (2019) 40(10) Company Lawyer 327.
45 Department for Business Innovation and Skills, Executive Remuneration Discussion Paper, September
2011, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/31660/11-1287-executive-remuneration-discussion-paper.pdf [Accessed 11 February 2021].
46 Cadbury reinforces this statutory duty of disclosure by providing at paragraph 4.40 that shareholders are entitled
to a full and clear statement of directors’ present and future benefits and of how they have been determined. The
role the Code provides to shareholders in directors’ remuneration goes beyond disclosure. Cadbury provides in
paragraph 4.44 that shareholders require that the remuneration of directors should both be fair and competitive.
47 Christine Mallin, Corporate Governance, 6th edn. (Oxford: OUP, 2019), p.241.
48 BIS, Executive Remuneration, Discussion Paper, September 2011, https://assets.publishing.service.gov.uk/
government/uploads/system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-discussion-
paper.pdf, p.10 [Accessed 11 February 2021].
49 "Government Publishes Draft Legislation amending Directors’ Remuneration Requirement", 15 April 2019,
https://www.iasplus.com/en-gb/news/2019/04/government-publishes-draft-legislation-amending-directors-
remuneration-requirements [Accessed 19 November 2019].
50 Department for Business, Energy and Industry Strategy, Corporate Governance: The Companies
(Directors Remuneration Policy and Directors Remuneration Report) Regulations 2019 — Frequently Asked
Questions, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/808993/corporate-governance-directors-renumeration-policy-renumeration-report.pdf [Accessed 14
November 2019].
51 Martin Petrin, "Executive Compensation in the United Kingdom—Past, Present and Future" (2015) 36
Company Lawyer 195, 196–197, https://discovery.ucl.ac.uk/id/eprint/1453284/1/Petrin,%20M.%20Executive
%20Compensation%20.pdf p.11 [Accessed 11 February 2021].
52 CIPD, "Total FTSE 100 Chief Executive Pay has Fallen by 13%" (21 August 2019) https://www.cipd.co.uk/
about/media/press/ftse-ceo-pay-falls [Accessed 11 February 2021].
53 Martin Petrin, "Executive Compensation in the United Kingdom—Past, Present and Future" (2015) 36
Company Lawyer 195, 196–197, https://discovery.ucl.ac.uk/id/eprint/1453284/1/Petrin,%20M.%20Executive
%20Compensation%20.pdf p.11 [Accessed 11 February 2021].
54 Alistair Howard, "UK Corporate Governance: To What End Regulatory Framework?" (2006) 29(3) West
European Politics 410, 416.
55 Gill Plimmer, "Kier’s Investors Rebel over Chief’s Potential £1m Bonus" Financial Times,15 November 2019,
https://www.ft.com/content/015a526e-07be-11ea-9afa-d9e2401fa7ca [Accessed 26 November 2019].
56 Plimmer, "Kier’s Investors Rebel over Chief’s Potential £1m Bonus" Financial Times, 15 November 2019,
https://www.ft.com/content/015a526e-07be-11ea-9afa-d9e2401fa7ca [Accessed 26 November 2019].
57 The Times, 28 January 2004. A discussion of other jurisdictions is outside the ambit of this paper as it is limited
to the UK only. However, an example in the USA will suffice. In 2010 a Goldman Sachs CEO received $9
million in share bonus just two years after the company had been bailed out by the US in the 2007–08 subprime
mortgage crisis. See Times Online, 2010; Stephanie Sy, "Bonus Shock: Goldman CEO Gets Just $9M" ABC
News, 6 February 2010, https://abcnews.go.com/WN/goldman-sachs-ceo-blankfein-9m-bonus-stock/story?
id=9768161 [Accessed 11 February 2021].

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58 BIS, Executive Remuneration, Discussion Paper, September 2011, https://assets.publishing.service.gov.uk/

government/uploads/system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-
discussion-paper.pdf p.6 [Accessed 11 February 2021]. See also; Barnali Choudhury and Martin Petrin,
"Corporate governance that ‘works for everyone’: promoting public policies through corporate governance
mechanisms" (Oct 2018) 18(2) Journal of Corporate Law Studies 381, 395; Martin Petrin, "Executive
compensation in the United Kingdom—Past, present and future" (2015) 36 Company Lawyer 195, 196–
197, https://discovery.ucl.ac.uk/id/eprint/1453284/1/Petrin,%20M.%20Executive%20Compensation%20.pdf
[Accessed 13 November 2019].
59 BIS, Executive Remuneration, Discussion Paper, September 2011, https://assets.publishing.service.gov.uk/
government/uploads/system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-discussion-
paper.pdf, p.10 [Accessed 11 February 2021]; Petrin, ibid, p.4.
60 Barnali Choudhury and Martin Petrin, "Corporate governance that ‘works for everyone’: promoting public
policies through corporate governance mechanisms" (2018) 18(2) Journal of Corporate Law Studies 381–
415.
61 Patrick Jenkins, "How Paying Chief Executives Less can help Corporate Performance" Financial Times 13
February 2017 https://www.ft.com/content/10952312-ee30-11e6-930f-061b01e23655 [Accessed 11 February
2021].
62 BEIS, Corporate Governance, The Companies (Directors’ Remuneration Policy and Directors’ Remuneration
Report) Regulations 2019 — Frequently Asked Questions, June 2019, https://assets.publishing.service.gov.uk/
government/uploads/system/uploads/attachment_data/file/808993/corporate-governance-directors-
renumeration-policy-renumeration-report.pdf, p.6 [Accessed 11 February 2021].
63 Patrick Jenkins, "How Paying Chief Executives Less can help Corporate Performance", https://www.ft.com/
content/10952312-ee30-11e6-930f-061b01e23655 [Accessed 11 February 2021]. See also, BIS, Executive
Remuneration, Discussion Paper, September 2011, https://assets.publishing.service.gov.uk/government/uploads/
system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-discussion-paper.pdf, p.10
[Accessed 11 February 2021]. For studies on the link between remuneration and performance, see, Godfred
Adjapong Afrifa and Venancio Tauringana, "Corporate governance and performance of UK listed small
and medium enterprises" (2015) 15(5) Corporate Governance: The International Journal of Effective Board
Performance 719. This article focuses on small and medium sized enterprises. Brian G.M. Main, Alistair
Bruce and Trevor Buck (1996), "Total board remuneration and company performance" (1996) 106(439)
The Economic Journal 1627; Ivan E. Brick, Oded Palmon and John K. Wald, "CEO compensation, director
compensation, and firm performance: evidence of cronyism?" (2006) 12(3) Journal of Corporate Finance 403;
Neslihan Ozkan, "CEO Compensation and Firm Performance: An Empirical Investigation of UK Panel Data",
University of Bristol, School of Economics, Finance and Management, Bristol, [2011] 17 European Financial
Management 2, 260–285, https://research-information.bris.ac.uk/en/publications/ceo-compensation-and-firm-
performance-an-empirical-investigation-of-uk-panel-data(89d842e2-6b62-4b02-bb05-dde303258188).html.
64 BIS, Executive Remuneration, Discussion Paper, September 2011, https://assets.publishing.service.gov.uk/
government/uploads/system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-discussion-
paper.pdf, p.17 [Accessed 11 February 2021].
65 PwC, Insight or Fatigue? FTSE 350 Reporting, 2010, http://www.pwcwebcast.co.uk/cr_ftse350.pdf, via https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/31660/11-1287-
executive-remuneration-discussion-paper.pdf, p.17 [Accessed 11 February 2021].
66 Attracta Mooney and Michael Pooler, "Royal Mail Faces Shareholder Pay Revolt" Financial Times, 10 July
2018, https://www.ft.com/content/d5b61604-8391-11e8-96dd-fa565ec55929 [Accessed 11 February 2021].
67 Matthew Vincent; "Executive Pay: Shareholders Ensure the Days of Excess are Over" Financial Times, 21
October 2019, https://www.ft.com/content/975fb9fa-f401-11e9-a79c-bc9acae3b654 [Accessed 11 February
2021].
68 Siobahn Riding, "Standard Life Aberdeen Suffers Heavy Revolt over CFO Pay" Financial Times, 14 May 2019,
https://www.ft.com/content/666dfe44-7664-11e9-be7d-6d846537acab [Accessed 11 February 2021].
69 Gill Plimer, "Kier investors rebel over chief’s potential £1m bonus" Financial Times, 15 November 2019,
https://www.ft.com/content/015a526e-07be-11ea-9afa-d9e2401fa7ca [Accessed 11 February 2021].
70 Mooney and Pooler, "Royal Mail Faces Shareholder Pay Revolt" Financial Times,10 July 2018 https://
www.ft.com/content/d5b61604-8391-11e8-96dd-fa565ec55929 [Accessed 11 February 2021].
71 Owen Walker, "Shareholder Warn over UK plc Opaque Executive Pay Deals" Financial Times, 5 November
2019, https://www.ft.com/content/59529be6-ffd7-11e9-b7bc-f3fa4e77dd47 [Accessed 11 February 2021].

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72 Daniel Thomas, "UK chairmen’s average pay rises by 30% since crises" Financial Times, 11 November 2019,
https://www.ft.com/content/14221c7c-0220-11ea-be59-e49b2a136b8d. See also https://www.spencerstuart.com/
research-and-insight/us-board-index [Accessed 11 February 2021].
73 However, according to a recent report, total FTSE 100 CEO pay has fallen by 13%. Nevertheless, the report
estimates that it would still take 117 years for a worker to earn a CEO’s annual salary. This fuels questions over
fairness, performance and governance. CIPD, "Total FTSE 100 Chief Executive pay has fallen by 13%" 21
August 2019 CIPD, https://www.cipd.co.uk/about/media/press/ftse-ceo-pay-falls [Accessed 14 October 2019].
The claim that pay is falling can be supported by the Kier Group example. As seen above the total pay of £2.2
million was a significant drop from the £5.5 million paid the year before and in the year 2018/19, the company
did not pay any bonuses.
74 CIPD, "Total FTSE 100 Chief Executive pay has fallen by 13%" 21 August 2019 CIPD, https://
www.cipd.co.uk/about/media/press/ftse-ceo-pay-falls [Accessed 14 October 2019].
75 BIS, Executive Remuneration, Discussion Paper, September 2011, https://assets.publishing.service.gov.uk/
government/uploads/system/uploads/attachment_data/file/31660/11-1287-executive-remuneration-discussion-
paper.pdf, p.8 [Accessed 11 February 2021].
76 https://www.cipd.co.uk/about/media/press/ftse-ceo-pay-falls.
77 https://www.cipd.co.uk/about/media/press/ftse-ceo-pay-falls. However, such reports must be treated with
caution because the Kier Group, Standard Chartered and Standard Life Aberdeen cases are only a few examples
of pay packages that have been defeated in AGMs in 2019 alone.
78 Independent Review of the Financial Reporting Council, December 2018, https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-
independent-review-final-report.pdf p.8 [Accessed 11 February 2021].
79 Michael C. Jensen and William H. Meckling, "Theory of the firm: Managerial behaviour, agency cost and
ownership structure" (1976) 3(4) Journal of Financial Economics 305.
80 Agency problem is often seen as the problem that arises from the fact that power in the company is placed in
the hands of people who are not the owners of the company. According to Keay and Loughrey, the agency
theory of the company requires board accountability in order to deal with the agency problem. However,
they bemoan the lack of clarity on the meaning of accountability in the field of corporate governance
despite the widespread use of the term. They argue that one effect of this is that it blurs the debate about
board accountability. Andrew Keay and Joan Loughrey "The Framework for Accountability in Corporate
Governance" (2015) 35(2) Legal Studies 252.
81 O. Williamson, Mechanisms of Governance (Oxford: OUP, 1996), p.253. Quoted in Keay and Loughrey, "The
Framework for Accountability in Corporate Governance" (2015) 35(2) Legal Studies 252, 258–259.
82 M. Dooley "Two models of corporate governance" (1992) 47 Business Law 461, 468; J. Roberts, "Trust and
control in Anglo-American systems of corporate governance: The individualizing and socializing effects
of processes of accountability" (2001) 54 Human Relations 1547, 1548. Quoted in Keay and Loughrey, "The
Framework for Accountability in Corporate Governance" (2015) 35(2) Legal Studies 252.
83 J.C. Coffee, ‘New myths and old realities: the American Law Institute faces the derivative action’ (1993) 48
Business Law 1407 at 1425. Quoted in Keay and Loughrey, "The Framework for Accountability in Corporate
Governance" (2015) 35(2) Legal Studies 252.
84 Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, "Investor protection and
corporate governance" (2000) 58 Journal of Financial Economics 3, 4.
85 La Porta, Lopez-de-Silanes, Shleifer, and Vishny, "Investor protection and corporate governance" (2000) 58
Journal of Financial Economics 3, 6.
86 FRC, Corporate Culture and the Role of Boards: Report of Observations, July 2016 https://www.frc.org.uk/
getattachment/d246eacb-5774-4912-98e1-c03f1c8f692f/Corporate-Culture-and-the-Role-of-Boards-Report-of-
Observations-tagged.pdf, p.23 [Accessed 11 February 2021].
87 Independent Review of the Financial Reporting Council, December 2018; https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-
independent-review-final-report.pdf [Accessed 11 February 2021].
88 Azeez "Auditors ‘Complicit’ in UK Corporate Failures" 23 October 2019, https://news.sky.com/story/auditors-
complicit-in-uk-corporate-failures-mps-say-11842171 [Accessed 27 November 2019].
89 For a discussion of the nexus of contract theory, see Jensen and Meckling, "Theory of the firm: Managerial
behaviour, agency cost and ownership structure" (1976) 3(4) Journal of Financial Economics 305. Jensen
and Meckling’s network of contract theory has been expanded on by Easterbrrok and Fischel. See Frank H.
Easterbrook and Daniel R. Fischel, "The Corporate Contract" (1989) 89 Columbia Law Review 1416, 1426.

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It should be noted that the theory is not without its opponents, many of whom see the company as a creation of
the state. See Grant M. Hayden and Matthew T. Bodie "The Uncorporation and the Unravelling of ‘Nexus of
‘Nexus of Contracts’ Theory" (2011) 109(6) Michigan Law Review 1127. See also, E.S. Adams and K. Knutsen
"A Charitable Corporate Giving Justification for the Socially Responsible Investment of Pension Funds: A
Populist Argument for the Public Use of Private Wealth" (1995) 80 Iowa Law Rev. 2.

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