I've been thinking about this issue a bit more, as I suspect it is one that Labour will need to have a proper look at if it wants to make any impact in corporate governance next time around. Just to recap, a frequent retort to any argument in favour of greater intervention in executive pay is that it is a matter between PLCs and their owners (shareholders). Extend this a bit further and the claim becomes that if there was really a problem shareholders would be doing something about it. So below are a few reasons why this might not be the case.
1. Trivial sums & bigger priorities
Some shareholders may take the view that directors might get paid a lot, maybe even too much, but that this is a relatively trivial amount in terms of the overall costs of the business. It's literally not worth bothering with. This is sort of a specialised case of the old asset manager cop-out about corp gov issues - if we were that concerned we wouldn't invest. Particularly if the portfolio manager likes the company management concerns about pay may get downplayed.
2. Unknowable effects
Even if they do feel that executives are paid too much, shareholders may feel that the uncertainty attached to seeking to restrain pay (will talent move elsewhere etc) is too great. It may be safer to grudgingly accept the status quo than to take a stand.
3. Arms race
If you believe that you need to pay the best to attract the best talent, why would you seek to restrain pay? Many asset managers won't hold the whole market, so may feel it makes sense for them to let rem comms open the throttle at companies in which they invest. But obviously, if every asset manager does that....
4. Spread too thin 1 - width
Some shareholders hold thousands of stocks, they simply may not have the time and resource available to tackle pay inflation effectively at a significant number in any year. (This might also make you ponder whether they can really monitor any other aspect of all those companies too, but that's a bigger question!)
5. Spread too thin 2 - depth
Some shareholders may feel that the size of their holding does not justify getting stuck into a company about executive pay. Again the aggregate effect of many investors taking this approach could be problematic.
6. Free rider
One of the most commonly-cited arguments, though I don't find it that convincing, based on the way I've heard asset managers talk. The claim is that some shareholders may feel that they personally don't need to act over executive pay, because others in the market will do so.
Another frequently deployed argument. Some asset managers may have mandates from the pension funds of PLCs where they have concerns about pay. Or what if the asset manager is part of a bigger financial services group that does business with them? Having not worked for an asset manager I have no idea how common this is, but again anecdotal feedback suggests it does happen, if rarely.
8. Culture and beliefs
Asset managers work in an industry which is highly paid, and in which economic liberalism is usually unchallenged. Does this mean that individuals working in the sector are culturally and ideologically desensitized to high pay, which in turn affects their decisions?
Not an exhaustive list, and some points are more theoretical than others. For what it's worth I think the earlier ones are closer to asset manager views, based on conversations over the years. Taken together though hopefully it's self-evident why we can't assume relying on the owners (at least as they are currently constituted) to restrain pay will lead to any different outcomes.