BlogsInertia thwarts big changes on excessive pay
The last thing we need is another truckload of rules designed to curb excessive pay
By Ben Griffiths | Published 11:00, 20 January 12
In a week when David Cameron again criticised the ‘out of control’ City bonus culture and called for a new moral capitalism, it was a welcome surprise to see Fidelity speak out against excessive boardroom pay.
It’s not unusual to have MPs of all parties scoring cheap political points by attacking bankers and boardroom executives. But for one of the stock market’s biggest investors to slam ‘over-generous’ and ‘over-complex’ remuneration deals is as rare a scene in the Square Mile as a contrite banker.
Among the proposals put forward by Dominic Rossi, Fidelity’s chief investment officer, was the requirement for boards to seek shareholders’ approval for new compensation deals for directors before any payments are made.
Additionally, Fidelity wants a minimum support level of investors holding 75 percent of shares to back any proposals; and for them to be pitched to shareholders as a special resolution at the company’s annual meeting. Currently, a vote of just 50 percent is sufficient to waive through a revised pay and bonus deal.
If the board fails at a second attempt to secure 75 percent of votes cast, Fidelity reckons the chairman of the remuneration committee should be required to stand down. It would be a clear signal, after all, that the people who set pay within a boardroom have lost touch with investors’ needs.
It’s all part of a package that the prime minister will find chimes with his government’s plan: to increase the voice of shareholders in key decisions on boardroom pay.
Nevertheless, a way must be found to keep a check on excessive pay without piling additional burdens on companies who do consult properly with shareholders and set fair levels of pay.
As Professor Philip Booth, editorial director at the Institute of Economic Affairs, warns it’s a matter of concern the PM believes further regulation - and higher levels of capital for banks - will promote his vision of ethical capitalism.
Booth believes extensive regulation of the financial sector has encouraged a box-ticking mentality that has crowded out ethics and judgement. It’s a complaint that can easily be levelled on remuneration committees.
The last thing we need is another truckload of rules designed to curb excessive pay that leave shareholders unable to change the status quo.
According to corporate governance group PIRC just 18 pay packages have been rejected by a majority of investors in 10 years. That tells us that the people most fed up with the way boardroom pay is derived are powerless to do anything.
With that statistic in mind, Fidelity’s idea that a 75 percent vote would be required to pass any changes to remuneration packages would certainly force companies to work harder in seeking to persuade investors to back their views. But I doubt if in most FTSE 100 companies that 25 percent of the shareholders do not fall into the realms of the big institutions, many of whom will be international investors with little to gain from following David Cameron’s agenda.
And if requirements become too onerous, more companies could simply seek to go private to avoid the additional scrutiny of investors and politicians alike.
The debate round executive pay is unlikely to fall silent in the near term. It’s far too emotive an issue. But I sense a lack of genuine inertia on the issue means big changes are still a way off.
Private Eye magazine recently published one of the best summaries I’ve read of why the current posturing on executive pay is unlikely to have an effect:
“Apathy and inertia often outvote activism. Increasingly, shareholder power in British companies lies with foreign investors who care little what politicians want. Small shareholders have been largely replaced by UK financial institutions … which do not want to micro-manage and are hard to hold to account by their client investors. Fund managers are part of the City bonus culture and do not like admitting mistakes. They prefer to vote with their feet and sell, rather than storm the boardroom. Changing all this will take more than headlines.”
Wise words, indeed. The prime minister has a long battle ahead on executive pay.
It’s not unusual to have MPs of all parties scoring cheap political points by attacking bankers and boardroom executives. But for one of the stock market’s biggest investors to slam ‘over-generous’ and ‘over-complex’ remuneration deals is as rare a scene in the Square Mile as a contrite banker.
Among the proposals put forward by Dominic Rossi, Fidelity’s chief investment officer, was the requirement for boards to seek shareholders’ approval for new compensation deals for directors before any payments are made.
Additionally, Fidelity wants a minimum support level of investors holding 75 percent of shares to back any proposals; and for them to be pitched to shareholders as a special resolution at the company’s annual meeting. Currently, a vote of just 50 percent is sufficient to waive through a revised pay and bonus deal.
If the board fails at a second attempt to secure 75 percent of votes cast, Fidelity reckons the chairman of the remuneration committee should be required to stand down. It would be a clear signal, after all, that the people who set pay within a boardroom have lost touch with investors’ needs.
It’s all part of a package that the prime minister will find chimes with his government’s plan: to increase the voice of shareholders in key decisions on boardroom pay.
Nevertheless, a way must be found to keep a check on excessive pay without piling additional burdens on companies who do consult properly with shareholders and set fair levels of pay.
As Professor Philip Booth, editorial director at the Institute of Economic Affairs, warns it’s a matter of concern the PM believes further regulation - and higher levels of capital for banks - will promote his vision of ethical capitalism.
Booth believes extensive regulation of the financial sector has encouraged a box-ticking mentality that has crowded out ethics and judgement. It’s a complaint that can easily be levelled on remuneration committees.
The last thing we need is another truckload of rules designed to curb excessive pay that leave shareholders unable to change the status quo.
According to corporate governance group PIRC just 18 pay packages have been rejected by a majority of investors in 10 years. That tells us that the people most fed up with the way boardroom pay is derived are powerless to do anything.
With that statistic in mind, Fidelity’s idea that a 75 percent vote would be required to pass any changes to remuneration packages would certainly force companies to work harder in seeking to persuade investors to back their views. But I doubt if in most FTSE 100 companies that 25 percent of the shareholders do not fall into the realms of the big institutions, many of whom will be international investors with little to gain from following David Cameron’s agenda.
And if requirements become too onerous, more companies could simply seek to go private to avoid the additional scrutiny of investors and politicians alike.
The debate round executive pay is unlikely to fall silent in the near term. It’s far too emotive an issue. But I sense a lack of genuine inertia on the issue means big changes are still a way off.
Private Eye magazine recently published one of the best summaries I’ve read of why the current posturing on executive pay is unlikely to have an effect:
“Apathy and inertia often outvote activism. Increasingly, shareholder power in British companies lies with foreign investors who care little what politicians want. Small shareholders have been largely replaced by UK financial institutions … which do not want to micro-manage and are hard to hold to account by their client investors. Fund managers are part of the City bonus culture and do not like admitting mistakes. They prefer to vote with their feet and sell, rather than storm the boardroom. Changing all this will take more than headlines.”
Wise words, indeed. The prime minister has a long battle ahead on executive pay.
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