Investment managers aren't going to hold CEOs to account over executive pay
In 2013, the coalition government introduced new ‘say on pay’ regulations empowering shareholders in UK companies with a veto over excessive executive pay awards.
Companies listed on the stock market now have to put their pay policy to a vote at their annual general meetings (AGMs). This is alongside an advisory vote on what they paid their directors the previous year.
The changes were good and sent an important message about responsible investment and shareholder stewardship.
However, the failure to involve other stakeholders in the process -particularly the companies’ workers – was a major oversight, as new research from the High Pay Centre now shows.
Very often, the money invested in the biggest UK companies comes from ordinary savers squirreling away a little of their income for later life.
However, it’s mostly controlled by investment managers concentrated in the City of London, and New York’s Wall Street, as the proportion of UK companies owned overseas continues to steadily increase.
So we’ve put vastly wealthy investment managers, based in wealthy financial centres, in sole charge of the UK’s corporate goverance.
Unsurprisingly, this hasn’t created a business culture concerned with the interests and values of society as a whole.
On top pay, for example:
- Not one executive pay policy put to an AGM vote between 2014 and 2018 was rejected by FTSE 100 company shareholders. Median pay for a FTSE 100 CEO currently stands at £3.9 million, 137 times the annual pay of the typical full time UK worker).
- The average level of shareholder approval of pay-related votes at company AGMs over the period stood at 91%.
- Only 11% of votes on executive pay attracted ‘significant’ shareholder dissent of over 20%.
This is somewhat at odds with the concerns of wider society.
- A Legatum Institute survey asked people if we should cap the pay of top executives or let companies pay what they want. By a 56 point margin, people were more likely to say cap the pay.
- A similar poll found 68% of respondents said that they wanted to prioritise increased equality over higher economic growth. Good luck finding a Government minister or business leader who acknowledges, never mind supports, this entirely mainstream view.
- Recent editions of the Edelman Trust Barometer found more people say big business acts in a way that is damaging to the interests of society than those who said it benefits society. More people also say that very high top pay is the biggest reason for a lack of trust in business.
Elected workers’ representatives on company boards aren’t the sole answer. They wouldn’t instantly change corporate Britain into some kind of giant boy scout movement.
However, they would increase pressure on business leaders to be slightly less sociopathic around issues like poverty pay and precarious working conditions.
This is why the business lobby fiercely opposed the idea when it was briefly proposed by Theresa May.
May rather feebly gave in to this lobbying, watering down the ‘requirement’ to introduce worker directors down to just an ‘option.’
Research for the Local Authority Pension Fund Forum suggests that only around 5% of companies intend to take advantage of this option.
The £3.9m-a-year CEOs and the investors in the City and on Wall Street probably view this as a good outcome.
We live in a less deferential, less hierarchical and more educated world than we used to.
Technology has made communication and collaborative decision-making much easier.
So a top-down managerialist approach, where a handful of directors issue orders for tens of thousands of workers, seems out-of-touch and anti-aspirational.
This approach, and the pay practices that reflect it, may soon come to represent terrible business practice as well as an affront to the values and interests of the wider public.
On the other hand, commitment to reforming the UK’s shareholder-centric model of governance and ownership will be recognised as the new common sense.
Luke Hildyard is the executive director of the High Pay Centre
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3 Responses to “With rich investment managers in charge, shareholder vetos on exec pay are meaningless”
Jill Brian
Reform of high pay is long overdue. The Cooperative system has merit.
I have suggested that the highest earners in an organisation should not earn more than 10 times the lowest earner. No doubt this will be criticised but 20 times the salary of the lowest earner should be the limit. I say salary of the lowest earner, not wages, to put things in perspective. We must also be wary of high earners introducing other perks / benefits & saying they are not counted as part of their earnings.
Patrick Newman
So is it practicable to pass a law the sets a maximum ratio of top pay to median pay (about £28,500)? Is it more productive to have highly progressive income tax regime (There’s one for you, nineteen for me -Beatles 1966) that does not set a threshold but does involve progressively higher marginal rates of tax. Another factor is the market for senior management is international although this should not be a show stopper. Worker directors and employee representatives on remuneration committees are essential.
Lawman
In fairness, a few fund managers work to influence plc boards for the better. However, that misses 2 points:
(1) that some FT100 Chief Executives, and other directors, award themselves obscene amounts of remuneration. The structure of bonuses creates the wrong incentives to the detriment of shareholders e.g. artificially increasing Earnings Per Share by accounting adjustments.
(2) the underlying beneficial shareholders are disenfranchised: holding through pension schemes, fund managers and nominees.
Today we have a possible solution. Using e-voting via your fund or nominee site you could instruct the trustee to vote your shares in a certain way e.g. ‘Against’. The fund could aggregate these underlying votes and then vote them accordingly e.g. 1 million shares For, 5 million Against.
There are problems with this. It may be impractical to expect lay people to understand and vote on every resolution; but at least directors’ remuneration could be covered. Otherwise there is the risk of shareholder apathy; just as we have voter apathy with public elections. However, voting facilities should be offered.