Sunday, 27 November 2016

The forward march of shareholder oversight halted

I'm going to stop blogging about corporate governance reform for a bit, as I'm starting to bore myself as I keep ending back at the same place. But the endless discussion about executive pay has helped me crystallise a couple of thoughts that I thought I would share with you lucky people. These are that a) executive pay has become a political problem of a type that is similar to immigration (though obviously a very different issue in numerous ways) and linked to this b) the next time there is a serious attempt to reform executive pay shareholder oversight won't be the major part of it.

So, first, the comparison with immigration. I think there are a number of similarities here. Most obvious is the chasm between "informed" or technocratic opinion and the public. The former argues variously that we shouldn't worry too much about exec pay because it's a small part of company expenditure; that structure is what we should look at not scale; that we should leave it up to shareholders to sort  out etc etc. The public seems to think execs are just paid too much money and have no self or external restraint. There is very little common ground, and neither pole of opinion considers the other is serious.

Technical specialists and policy makers argue that we have to proceed with caution - radical action might backfire, or could damage the prosperity that highly-paid executives apparently create for us. When political parties that try and push a little harder are attacked as "anti-business". It feels very similar to the "elite"/corporate lobbying around both the EU referendum and the Scottish independence vote. The public, righty or wrongly, hears scaremongering - Project Fear if you like.

This leads to another similarity with immigration a political issue: the gap between what politicians say and what they do in practice. Politicians recognise the public anger, but also hear the lobbying of powerful vested interests and the views of technocrats. So they try and steer a path between them. Almost invariably this leads to rhetoric that is far more fiery than the policy that is delivered. I've been through several rounds of "reform" of executive pay, or the threat of it. Each time the reforms are briefed to the media (which largely duly repeats the line) that this is a "crackdown" on "fat cat pay". Each time the actual policy proposals are modest at best, and always based on the same old same old of shareholder empowerment and greater disclosure.

I suspect to most ordinary people who don't follow this stuff closely, these kinds of reforms don't really register as a "crackdown" at all. That might involve people being fined, convicted or that kind of thing. Disclosing a bit more in an annual report and getting the very occasional vote against doesn't really move the needle.

It obviously isn't helped by the fact that despite policymakers giving shareholders ever more information and greater powers they seem to rarely use this to challenge companies. Let's be serious here: if the belief is that there is a problem with executive pay then the record of shareholders in challenging it is absolutely pathetic. Yes there are some investors that do try and push hard, yes there are a few (but very few) scalps a season. But overall there has been little serious pushback. And I personally believe this is unlikely to change.

So what the public hear politicians say - "crackdown" - and what they see in practice - exec pay going up, very little shareholder challenge - are in obvious contradiction. The impression given is that politicians are actually being shifty - making a lot of noise but not really delivering on the issue when they claim to be listening to public concern. We cannot be surprised if the public stop (or have stopped) taking the rhetoric seriously.

This leads on to my second point - what politicians will do about it. We can see with immigration that  politicians have felt the need to take more and more radical action as public belief in their commitment to act has evaporated. Eventually, and unfortunately in my personal opinion, politicians have felt compelled to take action that matches the words they use - hence the (failed) cap on immigration numbers, and now our edging towards tighter rules on freedom of movement. I suspect the development of public policy around executive pay is a few stages behind immigration, but I think it will follow the same path. Technocratic policy fixes will not be enough to convince ordinary people that the issue is being dealt with.

This leads me to conclude that the next serious attempt to tackle executive pay won't rely principally on shareholder oversight as a mechanism. I'm playing the "no true Scotsman" trick a bit here, as by definition I no longer consider that reforms largely relying on shareholders will make a dent and thus aren't serious.

I think we are (just) still in the phase with executive pay where politicians believe that using strong rhetoric will be enough, even if the policy is mild. And I don't think this can last. One thing I am pretty sure of is that another round of more disclosure and more shareholder powers will not make enough difference to change public perceptions. Not enough shareholders are motivated to act most of the time in a way that would really have an impact. I don't see any reason why a model we have been trying for 20+ years (and a shareholder vote on exec pay in the UK for almost 15) will suddenly start to work differently. Nor do I put faith in the idea we can "dissolve the people and elect another" by creating "better" shareholders through different portfolios or mandates or whatever. This is a sign of desperation caused by running out of options within the current approach.

So, sooner or later, the game is up, and politicians will look for something that really does make a difference and can be seen to be doing so. It won't happen in the imminent consultation, but I think it's in the post. Having both been through the executive pay reform process several times now, and seeing how politics is playing out these days, I am pretty certain the need to be seen to be intervening in a serious way inevitably points to something quite different. What this will look like I really have little idea, but if you think disclosure of pay ratios and employee representation on remuneration committees (which is what the Tories are talking about now) are dangerous radicalism then I suspect you're in for a bumpy ride.

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