With the collapse of another major British company comes another example to show how ineffective our corporate governance system can be.
During the small hours of the morning, Thomas Cook ceased trading after 178 years of continuous operation – stranding 600,000 holidaymakers and leaving over 20,000 workers jobless worldwide.
With the collapse of another major British company comes another example to show how ineffective our corporate governance system can be. The figures speak for themselves.
Between 2014 and 2018, the firm’s shareholders allowed it to pay its directors more than £20m. Its CEO, Peter Fankhauser, received over £8m. During that time, Thomas Cook had two CFOs who pocketed £7m together while its non-executive directors took £4m.
Meanwhile, the firm’s value collapsed by 95% from £1.7bn to just £69m. Of course, the executive pay bill represents a small proportion of the total value of the company and savings here would not have saved it.
Further, Thomas Cook was operating in a highly competitive market with tight profit margins as the rise of online competitors threatened traditional high street operators.
External factors like last year’s heatwave encouraging Brits to have a staycation and the rising cost of foreign holidays due to the low value of Sterling amid ongoing Brexit uncertainty did not help at all.
But such high pay awards show not only how unequal our wage distribution is. They reveal how weak the relationship is between pay and performance and how little accountability British business leaders face.
It could be argued that Fankhauser’s pay was connected to his performance. Since his appointment, the company recorded profits in 2015, 2016, and 2017, but he did not receive a bonus during the loss-making year of 2018.
Yet even without his bonus, he received £1m in 2018. During the previous three years, he earned £4.3m, £1.2m, and £1.8m.
Defenders of a system that produces such huge rates of pay with or without performance-related bonuses need to tell us what difference a bonus would make anyway.
They also need to tell us how they define performance. How do we know those executives were worth it? Could that money have been better spent on innovation, productivity or research and development?
The Thomas Cook saga shows that the UK’s corporate governance system is just not up to scratch. In 2017, shareholders cast 78% of votes in favour of the company’s remuneration policy. They approved a policy that produced these pay outcomes even as the firm flirted with failure.
Meanwhile, the directors will move onto their next lucrative gigs. In this case, they leave with 13 additional directorships between them.
Executive pay bears a weak relationship with performance and, as they walk away with million-Pound pay-outs each year, Thomas Cook’s directors show that they can just walk away while their customers and workers are left to pick up the pieces.
It’s time the rich and powerful in British business were properly held to account.
Dr Ashley Walsh is Head of Policy and Research at the High Pay Centre.
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