Shareholder ‘revolt’?! They’re the owners
I get riled when people – even those of a libertarian bent – claim that ‘responsible capitalism’ necessarily means ‘more red tape’.
Responsible capitalism should be an economic system in which property rights are properly protected. It should provide individuals with maximum freedom to take decisions over how their lives are managed. It should form a framework where major investment bodies wield the power that their financial resources ought to confer.
Sound confusing? Let me offer one example. In recent weeks there has been a rise in the number of protest votes against executive pay packages.
In listed companies, top pay is set by a remuneration committee, whose members are usually non-executive directors. The idea is to achieve arms-length regulation of the executive members, who decide the rump of company policy.
The flaw in this plan is fairly obvious. Are your golfing chums and fellow ‘supper-party’ goers likely to propose a radical haircut in your pay, just because they have the words ‘non-executive’ in their job title?
Do these chaps get hired into their portfolio of directorial roles by questioning whether a huge fall in profits ought to be reflected in your bonus package?
And regardless of directorial integrity, shouldn’t a company’s owners – not its managers – be calling the shots? Incredibly, while there is a legal requirement for companies to poll their shareholders on pay packages, there is no need for them to take the results of the vote into account.
Yes, that’s right: the owners of the company can overwhelmingly disapprove of the bonus arrangements that its managers have allocated themselves, but the managers can just ignore them.
In what other proprietorial sphere would such an arrangement be acceptable? Do the local police – who protect your bike from being stolen – ask you to vote on whether you’d like to lease it out to pay them a bonus, receive your refusal, and then do it anyway?
The elephant in the room is that large public companies often have a relatively small proportion of individual shareholders. Many big blocks of votes have traditionally belonged to institutions like pension funds and insurance companies, who you might instinctively assume would be less likely to complain.
But the reality is that more money for executives means less money for these funds to invest. It means a weaker rate of return for customers. It means fewer customers for those funds who don’t insist on a sensible rewards system.
And indeed recent votes have shown their willingness to take a stand. The Association of British Insurers issues ‘red-top’ and ‘amber-top alerts’ in relation to proposed packages, such as this one last week, in relation to industrial materials firm Cookson.
Both these organisations and individual shareholders ought to be given the power to make binding decisions on certain issues. Clearly, policy-by-referendum is no more palatable for companies than it is for national states, but if a poll is worth holding, then it is worth listening to.
As Abigail Herron of Co-operative Asset Management told The Daily Telegraph earlier this month, ‘“We’ve had binding votes on directors re-election for a long time now, so it’s not that much of an outlier of an idea. … Having a binding vote [on pay] would really focus the mind.”’
Such a move is already in the works, thanks to enlightened business secretary Vince Cable. But reports suggest that he is likely to back down over proposals to increase the majority required for pay approval to 75% (a ‘special resolution’, already used for other company procedures such as a change of name).
Given the increased influence exerted by hedge funds and sovereign wealth funds – both types of investor who, thanks to the source of their capital, often have the same trouble over pay impartiality as non-executive directors – the new threshold is worth fighting for.
These two simple changes require no more than a couple of flourishes of the pen over the Companies Act. They would do nothing to make the day-to-day running of companies more difficult; nothing to bind directors over which contracts they should sign, which assets they should acquire, or what they should pay their employees.
Shareholders entrust directors with these decisions. They just don’t trust them over their own remuneration. Let’s give shareholders – the owners – the teeth to make their bite felt.