Company directors must make decisions based on long-term performance considerations; investment managers must engage with the companies in which they invest and hold them to account when they fail to think long-term; shareholders, for instance pension fund trustees, must ensure that their managers are appropriately incentivised to engage and held to account when they don’t.
Shareholders must take front-line responsibility for the companies in whose equity they have invested their client funds.
Shareholders have previously spoken of their concerns that there were structural impediments to effective engagement.
Therefore I welcome the recent announcements by the FSA and the Takeover Panel that their rules do not constitute an impediment to effective collaborative engagement by like-minded shareholders.There is no structural or regulatory obstacle to the pursuit and delivery of effective stewardship. But does the will exist for shareholders and trustees to take seriously their fiduciary and legal responsibilities? Sir David Walker will have more to say on this.
There is an irony in the labour market not working effectively at the heart of financial markets; the citadel of market efficiency.
Supply is not responding to pricing signals. If some activities like proprietary trading are so profitable, banks clearly have an economic incentive to participate, provided risks are properly controlled and regulation complied with. But why do banks appear to be allowing a disproportionate share of surplus to pass to employees?
Do these employees really have unique talents, or are they largely reliant on the banks' capital and franchise and the banks' knowledge, from order flow? Logically, the banks would 'institutionalise knowledge', and nurture pools of talent to reduce dependence on individual talent; writing it down and building bench strength.
And yet they do not appear to have done this. Derivative traders are not footballers with unique talents, and should not be paid as though they are. Bank owners, our pensions and savings, are possibly being short-changed by ineffective governance and stewardship.
And why do M&A bankers get so hugely rewarded? What skill do the members of this small elite community have which cannot be replicated by others? I suspect a great deal has to do with the authority of the investment bank’s brand – which begs the question why individual bankers frequently pocket 50 per cent or so of the fee charged by the bank to clients.
Some get bonuses in excess of £10million per annum (and not always for advising on transactions which deliver all they promise, as we have seen in banking sector transactions in recent years). Why hasn't the market mechanism adjusted pricing? What is frustrating a logical market response? If the market was working rationally, these rewards should have led to a sharp increase in supply and downwards pressure on margins.
And finally, some good tub-thumping on relative pay levels:
There is another very important issue around remuneration: perceived fairness. Organisations with extreme distributions of income are inherently prone to greater instability. It is harder to foster shared values and common culture. It can be a source of risk.
The national minimum wage is £5.73 per hour. That means that someone working for forty hours a week for forty-eight weeks a year earns £11,001.60 per annum.
According to the Office for National Statistics' Annual Survey of Hours and Earnings (ASHE), "mean" gross annual earnings across all employee jobs in 2008 came to £26,020 and "median" gross annual earnings was £20,801, across all employee jobs.
I sometimes think that Remuneration Committees and senior investment banking executives need to be reminded of this reality before they disgorge huge bonuses. And they have to ask themselves whether they have fully explored all options to protect organisational and shareholder interests before going down the route of making payments which many in society find unacceptable in terms of reward for skill and contribution.
The whole thing is worth a read.