Monday, 10 January 2011

Open up remuneration committee membership

Interesting piece here from the High Pay Commission:
The problem with remuneration committees is that the directors who sit on them are mostly insiders. They also sit on other boards and are drawn from a small pool of non-execs. Boards seldom take chances with appointments and there is very little diversity within boardrooms.

This morning, Brendan Barber, who heads the TUC, called for employees to be elected to remuneration committees instead of the close-knit group of directors who currently populate them. I agree with Barber: I would like to see representatives from the workforce elected on to the remuneration committee. One or two employees would inject an important dose of realism into committee thinking on pay. They could also help back up maverick directors who fear to speak out in case they upset the rest.

Boards would fiercely resist a break-up in the cosy consensus that exists over pay. But a reform to the way remuneration committees operate would be a small step towards reducing the vast pay gap in Britain and injecting a little “fairness” into the corporate sector.
I agree with this, and it strikes me that this is one of the key issues in the BIS short-termism review (which people are Googling like mad about incidentally, and winding up here - last minute submissions alert!). What's more I think there's evidence in research into group decision-making that supports the idea - Sunstein's work which I have plugged previously most obviously. I also think you probably need two representatives from employees/stakeholders/investors/whoever in order to make it easier for them to 'defect' - much harder if you are a lone voice against 'authority'.


BlackRaven said...

Given that its an agency problem, and the shareholder is the party disadvantaged by above market pay deals greater shareholder power is the real solution.

The second agency problem can only be resolved by changing pension regulation such that the ultimate owners of the company, ordinary pension savers have control over their assets.

james said...

Tom, I saw this reprint of a Paul Hirst article and I thought of your blog:

"We live in an organizational society, yet the forms of control over large organizations both public and private have atrophied. This is most evident in the case of companies. Shareholders in Anglo-Saxon systems seldom exercise the political rights they do have, they exit if they are not satisfied and the secondary market in shares lets them do so easily. They also rely on the market to sanction company management. The notion of the republic of shareholders under the 1862 Companies Act in the UK, which made corporate status readily available for the first time, was intended as the primary means of protecting investor rights, but it has long been a fiction. Other stakeholders have no political rights and often no easy exit option through the market. Modern companies exhibit a clear divorce of ownership and control, where dispersed and indifferent shareholders leave policy to managers. It would hardly be possible to claim that corporate governance performs its political functions well, almost no aspect of the current system is satisfactory from passive shareholders, to weak non-executive directors, to compliant auditors. Yet corporations organized the major part of formal social life." []

Tom Powdrill said...

very interesting - thanks!

james said...

Also, an ebook has been released, Revisiting Associative Democracy ( which uses Hirst's normative perspective on mutuality to look at different areas of interest, including chapters on industrial policy and capital markets.