Rocketing CEO pay levels have more to do with psychology than performance
In the US, CEO pay dropped by an average of 2% in 2009. Still, ordinary workers needn't shed too many tears as the average total compensation for an S&P500 CEO hovered around the $11 million mark. Perhaps more significant is the gap between the average CEO's and the average worker's pay. From CEO's earning 42 times more than employees in 1980 this soared to a factor of 525 in 2000 before declining to a still eye-watering 319 times in 2009. Here in the UK we find a similar discrepancy between the boardroom and the shop floor. This doesn't automatically mean that CEO's are overpaid, although there's no evidence either way that they're providing 319 times more value than their underlings. Indeed, it's hard to see how you could ever disentangle the various causes and effects to determine this. What we can do, however, is look under the covers at why CEO rewards may be so high: and, as you might expect, it looks like this is less to do with performance and more to do with psychology.
Perverse Incentives (Again)
The founder of JP Morgan, John Pierpoint Morgan, once argued that a company's leader should earn no more than twenty times that of his employees, a rule of thumb only slightly tarnished by the fact that it was one that JP himself completely ignored. Of course, the real argument is whether better paid CEOs lead to better performance where it really matters. That's in the earnings statement, if you're interested. Bergstresser and Philippon looked at this in more detail in CEO Incentives and Earnings Management, wondering if in companies where CEO compensation is heavily biased towards earnings related elements such as stock options, there's greater evidence of earnings manipulation. It's an unworthy thought, of course, that CEO remuneration packages could induce the leaders of companies to direct our great corporations to behave to maximise the value of their take home pay at the cost of the shareholders that they represent.
So, of course, that's more or less exactly what was found. Attempting to align senior management with the interests of shareholders through remuneration packages seems to have incentivised them instead to find ways of maximising their take-home pay regardless of the longer term effects on the corporations they're the temporary custodians of. It's a key lesson – all incentives are perverse, CEO's are especially motivated by incentives: therefore CEO's are especially likely to pervert incentives.
Linking Executive Pay To Earnings
Although the numbers suggest that executive pay has always been linked to company performance this relationship was virtually formalised in the 1990's. Significant increases in executive stock options were deliberately engineered in order to more tightly align the interests of a company's managers with those of its shareholders. This, in turn, may have encouraged managers to manipulate stock prices by exercising their discretion in reporting earnings. For example, the researchers point to Xerox, Waste Management, Tyco and Enron as companies whose executives exercised significant amounts of options even as the companies were illegally inflating earnings. More generally they:
"... find evidence that more 'incentivized' CEOs—those whose overall compensation is more sensitive to company share prices—lead companies with higher levels of earnings management. These CEOs appear to more aggressively use discretionary components of earnings to affect their firms' reported performance. In addition, CEOs exercise unusually large amounts of options and sell unusually large quantities of their firms' shares during years where accruals make up a large part of their firms' reported earnings."Manipulation, Not Management
Separately a report from the comptroller of New York State found that between 1995 and 2002, just as companies were tying executive compensation to earnings, the number of companies that needed to announce changes to earnings bounced from 44 to 240. Conclusive it's not, suggestive it is: that the apparently superior alignment of executive and shareholder returns offered by earnings related executive remuneration packages may be, at least partially, down to the executives forcing the issue: incentivising executives to produce improves earnings doesn't necessarily incentivise them to do so by improving performance. Manipulating accounts will have just the same effect and is often a lot easier to engineer, especially if your auditors know what's good for their non-audit fees (see the Accounting Industry section of the NY comptroller report). This probably isn't especially surprising to most people and, to some extent, it's the sort of behaviour we might want in the chief executive of our companies – we hardly want our capital being looked after by a shrinking violet who's not prepared to stand up to suppliers, competitors, unions or any of the other myriad groups that want our earnings in their hands. However, if that's the type of person we want protecting our interests we'd better back sure that they're properly aligned with shareholders' and correctly overseen.
Scary Authority Figures
To take the last of these issues first, the oversight of executive pay packages is pretty much outside of the control of shareholders. We can moan, we can name and shame, we can even vote against egregious awards but boards can generally go ahead and pay whatever they want to. To counter this Sarbanes Oxley reforms in the US required boards to utilise independent directors to staff key committees. Similar recommendations have been recommended in the UK where nearly 50% of supposedly independent directors were personally recruited by the CEO. In all cases the qualifications required to sit as an independent director are unclear. At root the unwillingness of boards and senior officials of companies to stand up to over-powerful CEOs may stem from a simple calculation of the individuals' interests – keep quiet and keep a job. However, there may be a more powerful behavioural driver than this which is responsible for governance problems: the scary nature of our instinctive deference to authority.
The Milgram Experiment
The classical experiment is the Miligram Experiment – a scary experimental setup where ordinary Americans were induced to apparently electrocute innocent victims at the encouragement of an authority figure. The victims were, in fact, actors and the experiment wouldn't be permitted today but its findings still have special resonance within psychology. Stanley Miligram's follow-up work indicated that the participants carried on shocking because they felt a sense of loyalty and duty to the (personally unknown) experimenter. It seems that they were prepared to kill someone on the order of a stranger due to some odd drive for obedience. Although most CEO's don't demand that their employees commit murder on their behalf it's fairly obvious where this train of thought leads us. Further experiments by Miligram showed that the unthinking – or at least unquestioning – response to authority of participants could be challenged. As Morck records in Behavioral Finance in Corporate Governance:
"Milgram reports that dissenting peers, rival authorities, and absent authorities shook this subservience and reinitiated subjects' own reasoning. Corporate governance reforms that envision independent directors (dissenting peers), non-executive chairs (alternative authority figures), and fully independent audit committees (absent authority figures) aspire to a similar effect on corporate boards – the initiation of real debate to expose poor strategies before they become fatal."
Good CEO, Good Performance ...
Despite this corporate governance over CEO's will continue to be a problem because all powerful leaders aren't always a problem. As Adams, Almeida and Ferreira find in Powerful CEOs and Their Impact on Corporate Performance more powerful CEOs can lead to very bad performance. However, they can also lead to very good performance. Basically, powerful CEOs dominate boards and this dominance has a direct effect on company performance – good decisions lead to good performance and vice versa. Obvious this may seem, but it proves one point conclusively – a CEO's decisions can make a dramatic difference to a company's results such that if we could identify the good ones they might just be worth their huge paydays.
Know Your CEO
As for aligning corporate rewards with shareholder interests, well, that's easier said than done. Bank executives who were, back in 2007, sitting on a powder-keg of off-balance sheet shenanigans should have, by all that's reasonable in the world of perverse incentives, been selling all the stock they could get their hands on. Instead, as Fahlenbrach and Stulz record, they simply sat and waited for the apocalypse with the rest of us: despite having more stock and options than the most ardent advocate of shareholder alignment could possibly hope they blindly oversaw their companies into the abyss. To which all one can say is: being aligned with shareholders is good, but understanding the business you run is better. When all else fails, look for CEOs that know their industry. Then, and only then, they may end being almost worth what we pay them.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
19 comments
You cannot argue that people should get what they are contractually entitled to. (ok occasionally like sir freds payoff/ pension deal), but if hestor took the job and had this in the contract, how can this be questioned now.
I agree the pay is outrageous and should be performance related, (to long term profitability). The problem would come if the government controlled banks paid much less than the other banks, we would be in a situation like the Scottish FA, (no offence to any scots intended), every time they get a good manager who does well, one of the scottish or english premiership teams just poaches them offering them an extra zero on their pay packet.
This inevitably leads to all good managers leaving for better paid jobs and the one who stays is the one who doesn't do such a good job. I have no problem with a CEO earning x million pounds lets say 6, at tesco no doubt terry leahy earned this, he left, the new chap earns a similar amount, and after 20 years of knocking the stuffing out of the other uk supermarkets look at them now. Come back terry, 12 M is cheap. Not sure I'm so happy with paying the new chap 6 M though.
I personally object to paying top dollar for average/poor performance. Those who can get great performance consistently, are worth every penny. And it's not just at the md level this applies throughout the organisation, though obviously it becomes harder to measure further down the organisation,
K
There are several very pertinent articles in today's FT on this topic:
On the idea of a binding vote on the remuneration report, on the ways that Remcoms operate and on RBS (and Cairn) as well. These articles merely reinforce the points I made earlier in the thread.
Binding votes would be a huge error and genuine independence of opinion amongst NEDs is important in Remcoms. The focus should be on transparency, accountability and independence of NEDs.......
...but what we increasingly seem to have is a misinformed witch-hunt. [nb that comment isn't directed at anyone here - it is a reflection of the fact that even the FT today parrots the 49% figure total comp number and fails to mention that the original press release makes it clear that the average increase in base salary was a less headline-worthy 3.2%]
Several of the articles in the FT are effectively reporting increasing personal attacks on the position of Stephen Hester at RBS. Hester has my enormous sympathy for being in the firing line of such unadulterated rubbish. He is contractually entitled to a payout of shares, because (AFAIAA) he has delivered on all the important restructuring elements in his targets and his contract specified the remuneration at the outset. The time for people to complain (if they wished) was before the contract was signed - not after several years of work being performed and targets being hit! This sort of opportunist revisionism is the worst sort of destructiveness to emerge from the recent debates.
I'll offer you a prediction, re Hester: If RBS welch on their contract, then Hester will resign and sue for breach of contract.....and he would win. Nobody deserves to be villified and abused when they have actually done (a large and very difficult chunk of) what they were asked to do when they were hired....and there are some signs that most of the parties responsible now recognise that (even if Miliband the opportunist prefers to play to the gallery).
ee
I prefer the Labour party's proposals which were also covered in today's FT. Glad to see they are advocating exactly the same ideas as ShareSoc (perhaps they cribbed them from our well publicised ideas), which might otherwise be seen as a right leaning organisation whose members are wealthy shareholders!
Well as I said, the "insider" problem of shareholder engagement, on pay or anything else is a problem that needs resolving, which I think can be done. There are a number of solutions to this - one for example is to make any shareholder who is on a relevant committee an "insider". That would of course ensure that only long terms holders would serve on such committees because they would not be able to trade the shares (at least within a reasonable time period). There are other solutions also. But as I pointed out, this problem is already with us and needs resolving anyway. Shareholder or independent remuneration committees do not make it any worse a problem.
It would seem we'll have to disagree on that then.
However, a potential finesse for the issue appears in the FT today......which is to broaden out the process for Nominating Non-Executive Directors. Rather than Labour's suggestion (which relies on institutions being more active in nominations - and which would IMO suffer many of the same risks of excessive narrowness of candidate pools that people complain of today) perhaps a way forward would be to require Nomination Committees to formally interview at least three candidates who are put forward by (any) shareholders, whenever they have a vacancy for a NED or whenever a NED is facing re-election (which is every AGM, usually).
This might take the form of companies being required to RNS a "call for candidates", followed by selection of 3+ of those for interview well ahead of the AGM season (probably around this time of year for most companies, in fact, given lead times and limited numbers of board meetings). The default position should then be that one or more of those candidates should be put up for shareholder vote at the AGM, alongside any NEDs who are retiring by rotation but wish to continue.
That way if shareholders think the board needs to be refreshed, then they would have it in their power to put up candidates and vote on them.
I would say, however, that many companies would already be reasonably receptive to seeing potential new NEDs with acceptable CVs - but I see no harm in requiring the process to be formalised, so that if there are any well-founded shareholder concerns over governance in particular companies, a mechanism would exist which could drive change forward (without the need to make much change to the way corporate governance actually works from day to day).
ee
Point 1. If you look at the ShareSoc proposals in detail, you will see that it suggests that a forward looking binding vote applies only to the total pay of the board. In addition, the way this works with Investment Trusts is that they also put in a margin to allow for some increase on what they expect to pay in the current year. So such a resolution is not particularly inhibiting. You suggest that a CEO who suddenly dies would create a problem - it does not because clearly the total pay of the board would not change substantially.
Point 2. The "insider" or "shadow directors" problems are certainly issues that have to be considered.
-Taking the latter first. I doubt that anyone serving on a committee who advises the board would be considered a "shadow director". A board often relies on third parties for advice, and a separate "nomination/remuneration" committee or "shareholder" committee is simply another advisory group. A remuneration committee simply advises the main board at present - it is always the main board that retains ultimate responsibility and we are not proposing to change that. The proposed structure is that the separate shareholder committee advises the main board who then put the required resolution on pay to the AGM. It is shareholders at the AGM who would ultimately decide the issue. In this case, the main board could challenge the recommendation of the shareholder committee (and present some other option to the AGM) but they might find some difficulty doing that. So in reality, there would likely be a negotiation to ensure there was a consensus.
- As regards the "insider" point. Whenever I challenge the pay of the directors, or the recommendations of a rem comm, the typical reaction is "well we have consulted the major shareholders on this and they all supported it" (stated by the Chairmen at Conygar, Intercede, etc). So in reality, the folks consulted have already been made insiders! Nobody seems to worry about that.
There is clearly a legal problem here at present in that all "shareholder engagement" (particularly about major strategic decisions) can result in shareholders becoming insiders. This needs resolving and I think it can be, but this note is rather too brief to cover that issue in full. But I don't see remuneration decisions as being particularly "share price sensitive" so I wouldn't have any problem with an "exclusion" of debate on a shareholder committee that was discussing remuneration alone from being considered as "inside information".
3. I don't see any problem with applying the same principles of corporate governance to larger private companies. Indeed nominally "unlisted" companies such as AIM companies, to which the Combined Code does not apply should in my view have a cut down version of that Code applied. Some comply with the code developed by the SCA but many do not. ShareSoc is considering whether we should come up with such a code as the LSE, who are the listing body for AIM companies, seem to have very little interest in improving corporate governance standards.
The key difference is that a public company (listed on the LSE, AIM or elsewhere) offers shares to the general public. Any company that wishes to benefit from being a public company (and there are many benefits), should adopt standards that protect the interests of those investors and ensure that the company is run for the benefit of all the shareholders equally, not just the directors - this is what corporate governance standards are about. Unfortunately in small listed companies, many directors seem to want to run them as if they were private companies, i.e. that they can do what they want without reference to shareholders. If they wish to continue to do that, then it is right that they should no longer be publicly listed (or I would argue even be classified as public companies).
I do suggest you look at the what we submitted in detail to Vince Cable on pay, including the "shareholder committee" concept which is on our web site here: www.sharesoc.org/ShareSoc%20executive-remuneration%20response.pdf .
The detail of how these things would work are very important. A half baked implementation (which is what we might get if the objectors get their way), would certainly result in lots of problems as you suggest. The key is to get the details right.
It is important to emphasise that there would be no revolution. Any shareholder committee looking at setting pay is likely to take the advice of the directors or will be using the same remuneration consultants as at present. It will simply lead to a more "considered" process and likely thwart the more outrageous cases that arise at present.
I think you have misunderstood my point about insiders, or perhaps I didn't explain it well. It is my contention that it is simply impossible in many (though not all) situations to reach a considered and balanced view on appropriate pay without being made an insider to, for example, the strategic plans of a company. Accordingly, anyone on a Remuneration Committee should be in full possession of all relevant facts. If (as you suggest) they wouldn't be, then IMO there is a much higher risk of bad and inappropriate decisions, because basically you are suggesting that decisions on pay can be taken in isolation from everything else - and they simply cannot.
I think we can agree on that point.
However, in very many public companies there are extremely sound reasons for keeping information "tight" and running a company as privately as the law will allow. There is a very real and important tension between disseminating information to shareholders (ie more than the statutory minimum) and building the commercial future of the company itself - and the wealth in which shareholders expect to share. Taking things to extremes to make the point, if a company was forced to be completely open-book about all its plans to all shareholders, then you can guarantee that competitors would act to frustrate those plans and deprive shareholders of commercial opportunities. Shareholders should recognise that it is sometimes (and quite frequently, in some sorts of company) very much in their own interests for a company to be able to operate without providing a running commentary to all and sundry......
....so it doesn't always follow that wanting to "run them as if they were private companies" is necessarily bad for shareholders - or their wealth......providing that all directors are acting in the best interests of the company as a whole and are in full compliance with all regulatory requirements.
ee
Well it's good to hear from someone who is obviously as opinionated as myself, and I agree with some of what you are saying, but I do not see how a binding vote could damage anything, nor how replacing a remuneration committee solely composed of board directors by a wider constituency would be dangerous. Obviously it depends on how the detail is done, and I am not saying that a shareholder committee should not include a board director (probably the Chairman), nor that it should ignore advice from the board. The key is to get away from this divisive "us versus them" attitude between boards and shareholders. Both groups should contribute to obtaining a consensus on pay and other issues.
I much prefer the Scandinavian model where there is more consultation rather than confrontation.
But I certainly agree that there are many small companies, currently listed on AIM or elsewhere, which have weak governance. But to suggest they should be delisted is wrong. All companies, whether public or private should follow similar standards in my view. After all there are some very large private companies anyway - to suggest they should or can have weaker corporate standards is surely wrong.
:-)
I'm sure we both have to work at it really ;-)
I'll explain (again, in some respects):
1. Binding votes would be unable to adapt to a dramatic and unexpected change of circumstances. Every year some company CEO or other falls under a bus or dies in some sort of accident. At a time when a company may be under great (and very real) stress ....both emotionally for the staff and financially (in the event that, for example, the unexpected dramatic change triggers questions over bank lines etc).....it is hugely diverting and may possibly endanger the company's survival if the Board's hands are to be tied in dealing with the situation. A binding vote could only be undone by a further vote at an EGM - so the chances are relatively high that the Board will try to avoid that, even if that might require them to make a sub-optimal decision that they otherwise wouldn't have done. It isn't that difficult to think that they may hire the wrong man for the job simply because he is available and ticks the right box on pay (which should only be one consideration amongst very many!).
2. Extending a remuneration committee would either require non-directors to become quasi-directors...aka insiders.... (and thus subject to all the constraints that affect directors' dealings) or they will be participating in decisions over pay without being in full possession of the facts and circumstances that should properly be taken into account when determining pay. The blurring of the demarcation lines between Directors and non-directors would create some serious legal difficulties in a number of areas of the law and it really isn't evident to me that having external input would improve decisions one iota! The key point about RemComs is that the members should be able to take decisions without fear or favour in respect of any of the execs - in other words that they should be truly independent. If RemComs are only composed of Non-Execs and those Non-Execs are all clearly independent (and opinionated ;-)) then they should be able to reach perfectly sensible decisions that are balanced and which shareholders can readily approve. Furthermore (taking this proposal to an obvious conclusion by way of an example) it seems highly probable that a unionised business would have to offer a RemCom place to a union rep - that would create some pretty obvious conflicts of interest of its own if, for example, existing management was trying to bear down hard on pay across a substantial business.
I wasn't saying that they SHOULD be delisted. I was merely pointing out that small companies which are badly run (but where the board likes it that way) are likely to take the easy option of voting with their feet and sticking two fingers up at shareholders who don't like it. After all, shareholders who can't force sensible corporate governance on a company are not likely to be best-placed to resist a move to take a company private (as a number of very recent examples perhaps suggest!)
Yes of course. And I wasn't suggesting that. But you aren't expecting ShareSoc or any other pressure group to apply pressure to private companies, are you? So it follows that, over time, the pressures of being a public company will become even more demanding in relative terms than they are now - and I am merely pointing to the reality that the consequence will be a shrinking pool of public companies as fewer companies seek listings and some of those who are already listed will seriously consider delisting. After all, even leaving hassle aspects aside (which can themselves be enormous if individual shareholders habitually treat management as being at their beck and call), there are some significant costs to being listed as compared to being private.
I strongly suspect we are trying to end up in much the same place - but I'm merely trying to counsel against the dangers of being unnecessarily radical, even if the cheering masses might be happy to egg you on. It is important to remember than lynch mobs don't provide good corporate governance either....and misleading* "surveys" such as the one that sparked the recent furore are frankly pretty unhelpful!
* why do I say "misleading"? Go back to the original press release on the story: everyone in the press picked up on the headline "FTSE 100 Directors get 49% increase"....but nobody noticed the underlying figure buried in small print: "a modest 3.2% growth in base salary that FTSE 100 directors averaged over the last year.". And if you look at some of the detail, you will see that these "average" numbers on total comp are heavily influenced by a small number of particularly huge numbers paid to CEOs of multi-nationals, many of whom received very substantial LTIP awards (which reflected a multi-year performance and were not earned in a single year). The key with all such incentives is to keep them reasonably closely related to the long-term performance of a business (ideally with measures that are closely aligned to the rewards received by shareholders - hence the use of TSR)....so statistically one really should not merely include them in the numbers for a single year (unless of course one is a journalist looking to stir up the populace and sell newspapers!)
ee
One of the reasons why I respect Tesco, is that they do not appoint clapped out City regulars to be their CEOs.
They select their CEOs from their own most talented staff.
No wonder Tesco is so well run, by people with detailed knowledge of their business.
MD.
Getting institutions to use their powers more will not help by itself, because ultimately the boards of companies can ignore them. This happened at RBS for example where several institutions tried to dissuade the board from the ABN-AMRO takeover - they were ignored.
Or you can take the example of Rensburg AIM VCT where ShareSoc is currently running a campaign. Despite numerous representations to the board, the new Chairman and two other directors (one of whom is in fact a representative of the fund manager), do not wish to face up to the facts apparently, and do not look like they are going to do anything at all to correct the defects in the company which has a dreadful historic record. The only way we will get any changes seems to be to requisition an EGM and you can imagine the cost and effort involved in doing that. The "new" Chairman who has just got the job was born in 1942 and has been on this board for many years! So we have the quite typical situation where an ineffective board can simply sit on its hands and ignore the views of shareholders for months if not years.
Or consider the recent example of Intercede where the Executive Chairman (plus his wife who also works in the company) has just been awarded an outrageous LTIP that was put through the nominally independent remuneration committee. But when you examine the independence on the non-execs on that committee, you get a very different picture.
There is in reality no real and active shareholder democracy in most companies. Most shareholders do not vote, or stay informed about what they are voting for, or turn up at AGMs - and that applies to both institutions and private shareholders. That is why remuneration gets out of hand even in companies where there is a remuneration resolution (but many AIM companies, such as Intercede, do not have even that). You cannot fix excessive remuneration by votes alone, even if they are made more effective as they should be. It wouldn't have stopped the Intercede Rem Comm awarding the LTIP which is now a "fait-accompli".
As regards the four key suggestions that Emptyend makes, I fully support those points, but they would not be sufficient to fix many of the defects in UK corporate governance. That is why we are asking for all of the following:
1. A binding and forward looking vote on pay.
2. Remuneration and nomination committees should become “shareholder committees”.
3. Improved pay reporting with a national body producing comparative data.
4. The role of institutional investors and their lack of engagement needs fixing.
5. The disenfranchisement of individual shareholders needs fixing.
Other countries have tackled these issues, and come up with solutions without undermining the health of their business sectors - Sweden is a good example of better corporate governance, and binding votes on pay have been in effect in several countries for some time (and been used in Investment Trusts within the UK for a long time).
The general public, and shareholders, have got fed up with the status quo and are looking for substantive changes - not minor tinkering as is so usual in the UK, to really fix the pay problem and other corporate governance issues.
We'll just have to disagree on that. Of course it is difficult for institutions/shareholders to get a board to agree with them if they have spent the previous two decades kow-towing to the same board and telling them how great they were! Fred Goodwin didn't get to be powerful overnight - he acquired that power because the institutions all thought that he had the Midas touch in running banks....whereas the sad reality was that he got very lucky in finding that there were massive cost-savings to be ripped out when they took over NatWest (I know, because I used to work there well before Goodwin arrived!).
It is only over the last 2-3 years that there has been ANY pressure at all on institutions to use their powers more actively. Rome wasn't built in a day and neither can decades of slack governance attitudes be reversed overnight! It takes TIME for these things to work though - and what matters is that the pressure is continually maintained to ensure that changes move governance in the right direction.
I repeat the very important warning that your suggestions 1 and 2 are potentially very dangerous and could severely damage shareholder wealth in certain circumstances! Item 3, I see as a bureacratic irrelevance - that role is much better suited to major institutions themselves or to the likes of PIRC (who, IMO, should already be actively engaged in doing and disseminating such research!).
Your points 4 and 5 are, however, both crucially important! Fix those two and IMO you will fix the problem! The rest is just misleading and unnecessary flim-flam.
ee
I might add that, of course, institutional pressure is only effective where institutions have significant stakes. Further down the food chain, smaller companies may well be held mostly by non-institutional holders and it will be quite difficult to mobilise the vote. ShareSoc can certainly play a role there.
Generically, very small companies may tend to have weak governance because of inadequate oversight - either by non-execs or by shareholders. Perhaps this just indicates that there are companies trading as public listed companies which would be more appropriately de-listed and run as private companies???
One very probable conseqence of greater pressures on public listed companies is that more of them will de-list because the costs and restrictions of being public will outweigh the benefits. Such events may present shareholders with a fresh set of problems.
ee
If the government moves on executive pay then I'd expect them to move on footballer's pay as well. Ceo contributions are more worthy of 5 million a year pay packets than the 20 million odd footballers get for kicking a ball around twice a week in my opinion.
There's certainly plenty of excess corporate side though that's for sure in addition to the public sector outrages.
I'm sure many here will have noted our PM's comments over the weekend regarding executive pay and measures the government would propose to tackle the issue (if not, you can view them here: http://www.bbc.co.uk/news/uk-16458570 ). We welcome the aspirations expressed in that interview.
ShareSoc has today issued a press release expressing our views and concerns regarding government proposals. Our key message is:
You can read the full press release here: http://www.sharesoc.org/ShareSoc_Press017_Pay2.pdf
ShareSoc members can express their views on the "controlling pay" forum of our members' network: http://sharesoc.ning.com/forum/topics/controlling-pay
Regards,
Mark Bentley
Director
ShareSoc
Mark,
There was an extremely good piece in the FT's Lex column today on precisely this topic. I very much commend a careful reading of it to everyone with an interest in the issue!
Your ShareSoc comments include the following emboldened statement:
This seems to reveal a fundamental misconception: ANY director appointment is subject to a vote of shareholders at an AGM. And Directors are regularly forced, every three years (or sometimes more frequently) to resubmit themselves for shareholder approval at an AGM if they wish to continue on the board. In sum, a Director cannot be a Director unless shareholders have voted him into that role (save for co-optees between AGMs, who are then subject to shareholder approval at the following AGM)!
As to the point here:
....the important point here is that the Remuneration Committee should already be composed entirely of Non-Execs - and the same would very often apply to the Nominations Committee (though in many cases I would argue that it is a mistake for there to be no executive involvement - after all, the Executive are ALL going to have to work with each other and be able to do so in a constructive environment.
I think that involving general shareholders (who, by definition, cannot be insiders and therefore who cannot know the full range of considerations that must be taken into account by Directors) would be a disastrous wealth-destroying error.
Neither is the idea of a binding forward-looking vote a viable one.....none of us know the future - and to tie the hands of Directors in responding to the unexpected would be the height of folly. I spent yesterday at Addenbrookes, visiting a friend of mine of 40 years who has been totally incapacitated by a car crash on holiday. If he had been a CEO in the corporate world (which he effectively was until quite recently), any prior vote at an AGM on Exec remuneration would have necessarily assumed the status quo on management structure - but real life unfortunately pays no regard to the status quo......individuals and companies can be struck down by the completely unexpected - and it is then up to the board to take swift action to avoid calamity. Tying their hands isn't any help!
In my opinion, ShareSoc and others are tilting at the wrong targets. The problem doesn't lie to any great extent with the basic structures of corporate governance in this country - it lies with the fact that shareholders have paid near-zero attention to corporate governance issues for the last 40 years and so (by not bothering to vote or by thinking it doesn't matter) they have allowed bad practices to creep in to a relatively large number of companies. There is no need for new structures to remedy this - investors just need to have a laser-like focus on the likely areas of bad practice and to mobilise votes against bad practices wherever they emerge. The internet is a wonderful tool for that - providing the resource isn't being diverted into tilting at the wrong targets!
IMO the key issues for ShareSoc and others should be:
I really don't think any other changes are necessary. And I am certain that several of the suggestions that ShareSoc have made are impractical, undesirable and not in the best interests of shareholders! It isn't necessary or helpful to try to change the whole basis of corporate governance and it adds nothing to the debate .....except fog ....and soundbites that will undoubtedly entertain the masses and confuse politicians who know nothing of the practical realities of business!
What is necessary is to lean as hard as possible on institutional shareholders to actually use the present powers that they have. There is some evidence of progress in that area - but not yet enough.
Where I suspect that institutions could do with some help is having people point them in the right direction. ShareSoc and others seem to have had a recent influence in regard to identifying questionable behaviours and practices - but my guess is that institutions could use more help. For example, I recently did an analysis (from public documents) of the board composition and compensation within a particular sector. This revealed some absolutely massive differences in, for example, the number/proportion of non-execs and the pay and exact role of the Chairman. Such exercises, conducted once a year, would enable quite easy identification of companies which would merit more in-depth focus re board composition and compensation - and would be very much more productive than trying to change the whole system of corporate governance for no discernably-good reason.
ee
Hi ee,
There is no misconception. Other ShareSoc directors and I are well aware of that. The trouble is that, under current regulations a) the vote is retrospective; b) due to that there is little incentive for shareholders to take a proactive role in the selection of directors. There is no choice of candidates presented to shareholders, rather directors choose their co-directors and present it as a fait accompli to shareholders for ratification. That's how the current system works in practice (in most cases).
I saw at first hand an appalling example of the results of that last week, at Conygar's AGM. Michael Wigley, who was up for re-election was asked what he brought to he non-executive role (and rem com membership). He responded that he was not experienced in Conygar's property field but that he had City experience and lived close to the Chairman! The epitome of crony capitalism IMO.
We have also seen the results of the current system at the banks in the years before the GFC - and you yourself have commented on the inadequacies of many bank boards.
Change is sorely needed and we are pleased to note that the PM seems to agree - but I have concerns whether the government's proposed reforms will be effective and we will press to try to ensure that the measures proposed are effective.
Concerning the comparison with footballers, that is a totally spurious argument. There is a genuine market in footballers and talent receives the rewards that market dictates. That is not the case with many Board appointees (with honourable exceptions, of course). One of the most encouraging parts of the PM's statement was that he acknowledged that there was a market failure in the appointment and remuneration of executives. IMO, that is absolutely correct. The current system leads to the appointment of friends and colleagues, not necessarily the best candidates, and to a ratcheting up of rewards (driven by remuneration consultants who are themselves paid by those who's pay they are advsing on!), irrespective of performance*. I accept that talent and success deserves to be rewarded. I am unlikely to quibble with generous awards for Coastal Energy's directors, for example!
Timarr's original article explains the reality of the current situation clearly.
*This may be dressed up with "performance awards" but I have that often observed where performance has been mediocre or poor, the performance criteria are often adjusted to offer an easy hurdle to be surmounted. That has certainly been the case at Conygar, for example IMO.
Best,
Mark
PS having said my piece, I should also add that I agree with much of what you have written. There is also a lot that needs to be done to promote better engagement by shareholders. If you read the full press release you will see that we also touch on this.
We see the "intermediation" that has occurred between investors and the companies they invest in as a big problem. One small step we'd like to see to help address that is to properly enfranchise those who's holdings are in nominee accounts. Whilst pursuing our objectives, we will be engaging with bodies such as PIRC, the ABI and NAPF (as well as major institutions directly) to discuss how institutions can be encouraged/educated to take a more responsible role in governance.
Good to see that Cable's proposals have rejected the idea of widening RemCom membership beyond the boardroom and that the further consultation on binding votes seems likely to crater on the sort of stumbling blocks that I identified.
He has come up with an interesting twist on the Independence point I noted above, with his suggestion of two newbie NEDs on each board. Personally, I think that is too ambitious to write into law - I doubt there are enough candidates who are both qualified and interested in every case - but the concept of aggressive board refreshment is a point I would be wholly supportive of. Maybe companies will end up going down the route I suggested in post 15:
Peston is also quite interesting on some of the related issues today.
ee