Early on the book talks about the famous Milgram experiment (the one where subjects thought they were giving shocks to a person in another room when they got questions wrong). The experiment is principally known because it appeared to show how people defer to authority, but the book makes the point that it also tells us something about self-justification:
[T]wo thirds of [the subjects] go all the way to the maximum level they believe is dangerous. They do this by justifying each step as they went along. This small shock doesn't hurt; 20 isn't much worse than 10; I've given 20, why not 30? As they justified each step they committed themselves further. By the time people were administering what they believed were strong shocks, most found it difficult to justify a sudden decision to quit.This immediately made me think about the way that shareholders have effectively legitimised high levels of executive remuneration. I have no doubt that many (most?) people working in corporate governance at asset managers believe, looking back, that things have got out of control, but how did we get here?
I think at each stage we had a similar opportunity to challenge. But then the company putting forward a given policy - the authority figure (and unfortunately some corp gov people swoon a bit when faced with a real-life executive) - provided a justification. Our industry is different - we need to pay top dollar to recruit and keep the talent. So the investors let it slide. Next time the company comes back and says we need to pay more to stop the talent moving into private equity. Ummm.... ok then. And so on.
At each point most shareholders deferred, and in doing so will have justified their decision to themselves, and become more wedded to it. Therefore we reached the stage prior to the crisis where very few companies were facing serious shareholder pressure (no remuneration reports were defeated in 2008 remember). By that point, having let so much go past them, it must have been difficult to justify actually challenging a company that was only a bit worse than the others.