In response to recent revelations that water company executives have received £41 million in bonuses, benefits, and incentives since 2020, the government has introduced the Water (Special Measures) Bill to enhance Ofwat’s regulatory powers. The proposed legislation aims, among other reforms, to impose stricter controls on executive remuneration, granting Ofwat the authority to make rules which will have the effect of forcing companies appointed to be the water undertaker or sewerage undertaker for any area of England and Wales to block or remove directors and chief executives who fail to meet high standards of ‘fitness and propriety’ and to prohibit them ‘from giving to persons holding senior roles performance-related pay in respect of any financial year in which the [company] has failed to meet specified standards.’ This move is designed to ensure greater accountability and alignment with performance-related pay standards.
Four main aims of the Bill
First, it enhances Ofwat’s regulatory powers, particularly concerning performance-related pay. Ofwat will now have the authority to block or remove directors and chief executives who do not meet high standards of ‘fitness and propriety.’
This development is important from a corporate governance perspective, as it directly addresses the issue of executive compensation and its alignment with company performance and public expectations. Effective governance requires that executive pay be linked to performance metrics and regulatory compliance, ensuring that remuneration practices do not incentivise poor management or misconduct.
It is important to note that the proposed definition of a ‘senior role’ is very wide: ‘A person holds a “senior role” with a relevant undertaker for the purposes of subsection (2)(a) and (b) if the person—
(a) is a chief executive of the undertaker,
(b) is a director of the undertaker, or
(c) holds such other description of role with the undertaker as may be specified.’
Second, the Bill proposes increased penalties for minor offences, which are currently capped at £300. By raising these penalties, the legislation aims to promote higher standards of regulatory compliance, reflecting a governance approach that prioritises deterrence and accountability for repeated breaches.
Third, it updates the Special Administration Regime (SAR) to address potential financial failures of water companies. This will ensure that the costs of temporary nationalisation fall on the company’s bill payers, rather than the general taxpayer. Companies must inform the government before declaring insolvency, and any SAR costs not recovered through a business sale will be covered by water bill payers.
This reform has significant implications for corporate governance, particularly in terms of financial management and responsibility. It shifts the financial burden of failed companies to their consumers, highlighting the importance of responsible financial management and transparent communication with stakeholders. Effective corporate governance for companies means that companies manage their finances prudently and avoid practices that could lead to insolvency, thereby safeguarding the interests of both consumers and taxpayers.
Finally, the Bill requires the installation of monitors on an additional 7,000 emergency storm overflow pipes, which discharge raw effluent into the sea. This measure aims to enhance oversight and reduce environmental damage caused by sewage discharges.
From a corporate governance perspective, this provision emphasises the need for companies to be accountable for their environmental impact. Effective governance includes not only financial oversight but also a commitment to environmental responsibility and sustainability. By enforcing stricter monitoring and reporting requirements, the Bill aligns with good practices in corporate governance, which advocate for comprehensive environmental stewardship.
Will the Bill make a difference?
The effectiveness of these reforms will depend on their implementation and the broader context of industry reform.
As the Bill progresses, it will be crucial to assess whether these changes are sufficient to resolve the sector’s deep-rooted problems and align with good practices in governance and financial management. Critics argue that the Bill does not go far enough in addressing the root causes of inefficiency and pollution in the water sector.
Feargal Sharkey, an anti-sewage campaigner, and Matthew Topham from the pressure group We Own It have both criticised the Bill for being insufficiently transformative. They argue that it reiterates existing laws without delivering substantial reform and shifts the financial burden of the sewage scandal onto households.
Industry body Water UK has called for more fundamental regulatory reform and accelerated investment to secure water supplies and address infrastructure issues. They urge full support for their £105 billion investment plan, highlighting the need for reforms that address both governance and financial management issues within the sector.
