Executive Pay

Friday, 8th September 2017 10:07 - by Eric Chalker

The government has published its action plan, following a public consultation that was notably biased towards what ministers originally planned to do.  This was principally to curb excessive executive pay, expose companies more directly to their critics and, vaguely, improve corporate governance.   This gave it the opportunity to substantially improve the position of private investors, but this it has not only completely failed to do but, on the contrary, has if anything worsened it.

It is almost a truism that politicians rarely properly understand what they legislate about, which is why there are so often unintended consequences.  For example, in referring to ‘shareholders’, the government and its agencies apply this term generically, making no distinction between different classes.  The worst mistake is to believe that private investors using nominee accounts (a practice that government itself has actively encouraged) have shareholder rights, which (despite a recent article in the Financial Times claiming they do) they do not.

It is private investors, putting their own money into company shares, that are most exercised about excessive executive pay, yet they have the least influence, despite their number.  As more and more of them encounter difficulties in voting on this and other matters, responsibility is almost wholly left to fund managers of one kind and another.  It is that class of shareholder, managing other people’s money, which is responsible for allowing executive pay to grow excessively, while the challenge that individual investors can present has been progressively diminished.

Under the coalition government, Vince Cable’s BIS department did a great deal of work that was leading towards a dramatic improvement in the position of private investors.  The 2015 general election cost Vince Cable his job, but work continued until it was stopped following the 2016 referendum.  All that work appears to have been jettisoned by this government, which seemingly pleads ignorance of it in the recent paper, simply reflecting self-serving financial services industry claims that to do anything would be too difficult or costly.

Going in the wrong direction

Rather than set out to redress the balance between those investing their own money and those who have no such self-interest, this Conservative government has chosen to go further down the path of intervention and regulation.  This will certainly add to the length of company reports, occupy directors’ and staff time and is surely likely to have more than simply a direct, monetary cost, while adding little if anything of value to companies’ profitability.  Rather than stimulate business to perform better, this seems likely to sap energy and dull the spirit of enterprise that most investors would like to see in the businesses in which they invest.

This is most clearly seen in the proposals substantially to enhance the role of the Financial Reporting Council, which sets and monitors the Corporate Governance Code.  What started as a much-needed City initiative decades ago gradually became a government agency and is now to become an enforcer.  Unfortunately, it is trapped in a mindset that pays no more than lip service to the needs of private investors, whose concerns have for years been brushed aside.  However, reading between the lines of this government paper there is a threat of something much worse, namely some form of board accountability to third party interests, which could only dilute yet further the influence of private investors.

The Green Paper asked for consideration of ‘designated’ directors to represent such interests, or ‘stakeholder panels’ as an alternative.  Although the government has no declared position on this, the very introduction of such a concept opens the way for a future, less ostensibly private-enterprise-favouring government to adapt the idea and place public officials onto company boards.  Coupled with a much-strengthened Financial Reporting Council able to enforce its will upon companies, such an appointee might see ‘social responsibility’ as more important than commercial enterprise.

Footnote

It is worth reproducing a couple of items from the manifesto of the UK Shareholders’ Association (UKSA).  These are relatively simple proposals, yet would surely have a significant effect if implemented.  Unaccountably, they were not mentioned in UKSA’s response to the Green Paper.

• New directors’ contracts of employment and any significant changes to directors’ contracts of employment should be written in such a way that they will not have full legal effect until after members’ approval has been given to the directors’ remuneration report.
• A company’s owners must have the right to control the pay of directors and senior employees.  Remuneration consultants must therefore be made accountable to the shareholders, their reports made available to shareholders and their reappointment sanctioned at each AGM. 

I cannot help but think that the introduction of such simple and easy to implement ideas would do more to curb excessive pay than extending yet further the already overly lengthy remuneration reports and attempting Mao Tse-Tung style public humiliations. 

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.