it is not altogether obvious that turning this vote from an advisory one into one with compelling force would lead to another step change in shareholder engagement with executive pay.
The big uncomfortable fact is that many investors are, by dint of who they are, absentee landlords.
If they are hedge funds and other speculators that hold shares for months, or weeks or even fractions of a second, they could not give a fig about whether a chief executive is paid £4m a year or £5m a year.
Sunday, 8 January 2012
The politics of executive pay
We are entering a very interesting period in the executive pay debate. Today's Andrew Marr interview with David Cameron confirmed one reform we can expect - some kind of binding shareholder vote on remuneration. Cameron also said he wants to address the issue of executives setting each others' pay. But when pushed on the disclosure of pay ratios, and on employee representation on rem comms, he was not committing to anything.
The language he used was also interesting. As usual the argument was made that there is an issue of rewards for failure, but he quoted the IDS headline stat on growth in reward in the FTSE100, and he also talked about "market failure". My own view (and I am genuinely trying to take off my pro-Labour goggles) is that Cameron is very media-oriented, so my inclination is to believe that the language employed doesn't have any depth to it. Because if the PM really does believe what he says - that there is a market failure in executive reward - that goes significantly beyond rewards for failure, and would require serious intervention. If you believe instead that Cameron is principally trying to make high pay go away as a political problem for the Tories (who, polling shows, are seen by punters as favouring the wealthy) then what we are seeing makes a lot more sense. (After all note it is Cameron, not Vince Cable, who is pre-announcing some of the conclusions of a consultation that is being undertaken by BIS.)
On the detail (such as it is) as I've repeated ad nauseum on here, there's always been a question mark over whether shareholders will tackle high pay. Shareholders already have an advisory vote on remuneration reports, and a binding vote on new share schemes. On rare occasions they have used these to defeat companies. But rare is the word. So why would Cameron think that giving shareholders a binding vote would make a difference? Surely it won't unless shareholders - and really in practice we mean asset managers - are willing to vote against more often, and, if anything, there's an argument that some shareholders might use a binding vote less often than an advisory one. Putting the emphasis on shareholders to make the difference looks like an odd strategy given recent history. It is very notable that a lot of immediate reaction on Twitter this morning to the idea was very negative, for exactly this reason. Pesto was similarly sceptical in his blog today:
This is rapidly becoming the popular wisdom, which is quite a sharp break with opinion in the business comment pages even a few years back. So it could be that this is seen as a duff idea from the start.
What about this idea of trying to restrict cross directorships? As a number of people have pointed out (and I doff my cap to Manifest for their blog piece) the allegation that this is part of the problem doesn't stack up. In any case, whilst changing a few rem comm chairs would not require much effort, neither is it likely to make much difference. Again, it looks a bit like wanting to be seen to "do something", rather than wanting to address the problem.
And what is the problem? Again, I make this point regularly but, in my opinion, rewards for failure should not be the principal concern. It's a much deeper trend whereby directors of large PLCs across the board have been able to extract more reward from the companies they run. The reasons for this are unclear. I would agree that a failure of shareholders to act is part of the problem, but it's also a trend that has emerged since the collapse of the post-war consensus and the decline of organised labour as a countervailing force within companies. If your concern is really the industrywide trend, rather than the rare Fred Goodwin type cases, it requires a serious strategy.
Unfortunately if the Coalition's action on executive pay is limited to what Cameron focused on today then we can expect to see executive reward continuing to rise compared to that of the rest of the workforce. It's an odd approach, given that it means we'll probably need to have another look at the issue in a few years.
Looking a bit more at party politics here, the fact that exec pay is a hot public policy issue again also means we're seeing some competition to look tough on pay from both Labour and the Lib Dems. The consultation Cameron is seeking to steal credit for is a BIS initiative after all, so Vince is going to want to try and push as far as possible. It's hard work reading the tea leaves on the balance of opinion on the idea of employees on rem comms, but a few reports have said that Saint Vince is in favour. This is one area where Labour's position has been consistent (ie we support the proposal) and have been more radical than the Coalition. If Cable can't get it through expect to hear a lot more about it.
I think we may also see some pushback from the opposition on the idea of focusing mainly on beefing up shareholder powers. Labour can legitimately say that it gave this a try with the introduction of a shareholder advisory vote in 2003 and investors haven't seemed to be keen to use it. Since then the shareholders of UK PLC have changed too, more overseas investors for example and maybe a greater slice held by hedge funds. So relying on shareholders to police pay could be portrayed as even weaker. Again, if Vince can't win on the employee representation point, it's quite easy to say to Cameron (and it will be the Tories that will be the focus) why do you trust hedge funds more than employees to address high pay? Attention would no doubt also be drawn, again, to the Tories' reliance on City funding, the honours list etc.
Notably Labour has also said it would introduce the High Pay Commission recommendations in full. That includes the voting disclosure recommendation, and I note that Chuka Ummuna has focused on this one a few times. As someone who has followed this one for years, I would merely point out that Lib Dems and Tories successfully combined in the Lords to vote down the relevant clause in the Companies Act (it was later reinstated of course). The Tories were particularly opposed, literally reading from the asset management lobby's script.
For all these reasons I think Cameron may actually be playing with fire by seeking to get headlines out of executive pay if he won't back it up with real reform.
Of course the bigger political point lurking behind this discussion is the nature of the governance regime. If shareholders are not in a position to act on pay, is shareholder oversight in general flawed? If employee representation on rem comms is acceptable, why not on the board? There are big issues here that have not been properly reviewed for years. Exec pay is merely one of the symptoms that draw attention to them. Despite all the renewed talk about 'responsible capitalism' I'm unclear whether any of the parties has the desire to really get stuck into this, but I hope Labour has something to say.