Pumped-up shareholders have enjoyed landing punches on plump corporate paunches in recent weeks, drawing blood at several companies where executives targeted by remuneration protest votes have resigned. The result: satisfied newspaper editorials on a ‘shareholder spring’, anticipating even sharper discipline when, as per Vince Cable’s proposals, remuneration votes become binding.
Don’t raise your hopes too high. As the BBC’s Robert Peston noted in a recent blog, the protests do not question high pay as such, just paying for failure. Better than nothing, you might think. But the difference is between tinkering and fundamental change is critical. Tinkering with present methods is a classic case of doing the wrong thing righter (and thereby becoming wronger). The effect will be to focus even more time, ingenuity and money, not less, on trying to make the unworkable work. Concocting new formulas for performance-related pay and bonuses is the wrong remedy for the wrong problem – the unfeasible in pursuit of the unjustifiable.
Can and should shareholders be expected to control executive pay in the first place? The answer to both questions is no. To start with, in an era of churn and high-speed trading when the average holding period for a UK equity is seven months (three for the banks), which shareholders? Those in it for the long term are outnumbered 30:70 by short-term gamblers and foreign owners with little interest in pay and governance. Although big UK shareholders have combined to strike a blow or two in recent AGMs, in its recent report Will Hutton’s Ownership Commission judged that they had made a poor fist of stewarding the UK’s assets generally, largely because of endemic short-termism and the intractable difficulty of speaking with one voice.
In practice, far from restraining managers, shareholders have often done the opposite. As the Bank of England’s Andy Haldane noted in the London Review of Books, ‘In the 19th century, managers monitored shareholders who monitored managers; in the 21st, managers egged on shareholders who egged on managers’. What’s more, the ‘shareholders’ who wield the telling votes aren't the beneficial owners but institutional fund managers operating to the same short-term performance incentives as the managers they are supposed to be monitoring. Are they likely to risk calling attention to what they are paid for mostly matching the index by proposing fundamental change? Turkeys, Peston points out, rarely vote for Christmas.
By choosing fast exit, short-term shareholders effectively forfeit the right to voice. They are entitled to one but not both. They also demolish their own claim to primacy, resting as it does on the idea that bearing all the risk, shareholders are entitled to all the reward. That is an offence against common sense, not to mention elementary justice. The truth is that shareholders can, and do, far more easily sell their shares than workers can find another job. What’s more, it is employees who directly create value through their knowledge, skills, and entrepreneurship, not shareholders – buying shares on the secondary market doesn’t even contribute capital. Shareholders own own shares, not companies. There is simply no argument for shareholders, who have failed to do so in the past – and who helped devise the governance arrangements that legitimised the discredited reward mechanisms used today – alone deciding levels of executive pay.
Once that is admitted, the whole question of what to pay corporate high-ups is transformed. Long neglected issues of internal fairness, of critical importance for real as opposed to stock market performance, bring a stinging breath of fresh air as they rush in from the cold. Forget shareholder alignment: even überguru Gary Hamel, as red-blooded an advocate of capitalism as you can find, believes companies would be better off aligning CEOs’ interests with those of value-creating employees rather than distant shareholders. So of course employees should be on remuneration committees. Charles Handy would go further, giving long-serving workers, and possibly customers too, voting rights. Bonuses would shrink or preferably vanish, as would share buybacks. Paradoxically, cutting shareholders down to proper size as well as managers would in the long term benefit them too, as companies retained more cash to reinvest in building markets, better products and jobs. The insidious rise of income inequality would be reversed, so society would be the gainer too.
The current spat between boards and shareholders is a public settling of scores between the 1 per cent – entertaining but irrelevant to the rest of us. A proper shareholder spring would be about resetting the social contract, nothing less – a giant first step towards rebalancing the economy in the truest sense.