Tuesday, 18 August 2009

Compass campaign for a High Pay Commission

Though the Compass initiative is a bit vague in what it's trying to achieve, I really struggle to see a good argument against some sort of review of executive pay, at least to establish some incontrovertible evidence about what the current state of play is. There is however a really bad argument regularly deployed against any such intervention - that this is a matter for shareholders and boards alone. It's an argument I've already seen used against the Compass campaign, but (quite aside from FSA and possible government intervention) it doesn't stand much scrutiny.

For one, 'shareholders' tend to be agents themselves (the 'principals' being pension funds, individual savers etc), and most fund managers not unreasonably interpret their brief from the principals to be to generate returns rather than to police pay (or other governance issues). And in the general scheme of things in most companies (the finance sector being an outlier here) executive pay doesn't represent a big cost. It therefore arguably doesn't make a lot of sense for fund managers to get tough on executive pay if that means they increase their own costs as a result of exercising oversight. In the meantime the cost of executive pay keeps increasing, but because it's happening across the board too it's only really the extreme cases that raise any shareholder concerns - as evidenced by the handful of company defeats over remuneration. The general trend is not challenged, even though - as far as I can see - the link to performance is not there.

Culturally I also think most fund managers buy into the idea that you need to pay people at the top a lot of money, because that's the kind of world that they inhabit (At the same time of course they are keen to see companies 'strip out' other labour costs!). Then add in the fact that lots of large investors diversify so that they can weather a blow-up in one part of their portfolio without it doing too much damage, and the incentive to exercise oversight reduces still further.

The evidence of the lack of shareholder oversight is clear. If flawed remuneration policy was a contributory factor in the financial crisis then we can say pretty safely that shareholders didn't spot this, even though it ought to be in their own self-interest to do so. No bank apart from RBS has faced any serious shareholder pressure over pay. And as I regularly point out, there's no evidence from AGM results this year of a serious general investor revolt over pay (though no doubt there will be higher average votes against this season).

Whether a High Pay Commission is the right way to address the issue of high pay is open to question. Personally I would like to see the Government instigate a review of how the shareholder vote on remuneration reports has worked - both in terms of pre and post-vote trends in remuneration and how shareholders have used the right in practice. But to simply repeat the argument that it's all best left to shareholders - when recent events and longer-term trends that suggest that not enough shareholders want to do the job - suggests to me that people making such arguments are either ignorant of what evidence there is, or are offering a solution that they know won't make any difference.

No comments: