Wednesday, 31 August 2011

Running out of road on exec pay

For a variety of reasons, I've felt a lot less like blogging recently. Some of it is due to the intrusion of real life, but latterly I've realised it's also because I'm not sure what I think. When I first started writing this blog I had a pretty good idea of what I thought needed attention and what I thought some of the solutions might be. As I've blogged before, my orientation within the Corp gov/RI has always been a pretty pragmatic one - I might prefer another economic model, co-determination or whatever, but you have to act within the framework that faces you (whilst pushing for change to it).

As is no doubt obvious, a mixture of the experience of the financial crisis and some further reading, particularly of older Left perspectives on Corp gov, has altered my views quite a bit. I've always thought that the nature of the financial system (especially the delegation of 'ownership' to asset managers) has made effective shareholder oversight difficult. What I didn't grasp was just how reluctant many managers are to challenge management, even when it clearly could be beneficial. Status quo bias is endemic.

Reading further back in Corp gov history it's notable that the idea that shareholders are owners, or should be afforded primary position in terms of influence, was not taken seriously until very recently. As I've blogged previously, Crosland, in his own pragmatic way, says it's not even worth making legal or structural changes since the notional ownership role of shareholders has no serious application in reality. Fast forward and the unions no longer provide the same kind of countervailing power within companies that they did when Crosland was writing, and corporate power generally appears to have strengthened. Therefore some on the left have seen developing the concept of shareholding as ownership as an alternative way to restrain that power.

Labour developed this idea in government, and a common thread can be traced through initiatives such as the Company Law Review, Myners Review, DRRR etc. To reiterate this was a break from previous theory on the Left about corp gov, an arguably stakeholder theory provided a potential alternative in the mid 90s, but a 'shareholders as responsible owners' conceptual approach has dominated since.

In particular it has dominated in the executive pay debate, where a number of difficult problems have been shoveled into the 'shareholders can deal with it' box. Hence the repeated suggestion that the principal problem is 'rewards for failure', and the principal solution put forward is better performance linkage. It has been argued by some on the Left that executive pay is only an issue for shareholders and boards. And it's been argued that shareholders have a particular interest in policing pay, as poor policy and practice can be a proxy for poor governance generally.

There are a number of problems with such an approach, and they are now beginning to make themselves felt. Most obviously, many asset managers don't really care about scale of rewards. They may push on performance linkage but even achieving this means that execs can still push up the size of reward, and that's exactly what happens in practice. Simply stating you are against rewards for failure means you fail to tackle rent extraction, which (IMO) is what happens in practice. And it happens across the board too, so if you are bothered about the pay gap it simply isn't true that poor policy is a proxy for poor governance generally, because most are at it.

We are now in an environment where there is growing concern about the gap between rewards for the executive class the rest of us. I fundamentally believe that if any Government wants to address this they either need to find a way of getting shareholders to change their approach, or they need to make a break with recent policy. Most institutional investors and their representatives at the moment simply won't go into bat to address the pay gap. So either they change, or something else does.

So, to come full circle, I think this is why I am struggling to write on governance stuff currently. I have a sense that any attempt to address executive pay excess may start to pull away at the policy consensus that has existed for some time. But I don't know where we go next. It should be a creative time, really, but my brain isn't quite up to it, yet.

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