Tackling executive pay by empowering shareholders is good for business and crucial to building a new economy
By Chris Leslie
—While cold economic weather bites hard in households across the country, for some privileged individuals this time of the year brings great cheer: the annual bank bonus season. You would have thought that the banking sector’s poor performance when it comes to lending to businesses, losses from mis-selling, and the Bank of England’s pleas for moderation would see zero bonuses as the norm. But you would be wrong. In the rarefied circles of our top banking boardrooms, senior managers continue to defy the standards of fairness and restraint expected of everyone else. Lavish bonuses are a throwback to the days of excessive risk-taking and executive indulgence, which should have passed into history by now.
Even the Tories are realising that this looks bad. The prime minister has made his annual hand-wringing intervention decrying the bonus culture, but proposes only the most modest of changes. The government shows little embarrassment for its inaction, sending out Vince Cable and its loyalist backbench troops to puff smoke in the air and convince the public that they genuinely believe in ‘doing something’ about all this. But while Conservatives see this excessive behaviour as an inconvenient symptom of an otherwise heroic free market, Labour must show that real reforms to the root causes of this dysfunction will yield tangible benefits.
Good governance must reach far beyond curbing unmerited pay for executives. It must also be at the forefront of the pro-business agenda and efforts to build a new economy. Crucial to these changes must be a rebalancing of power between top managers and shareholders. A malfunction of the principal-agent dynamic can cause catastrophic company failure, the autopsy reports for which show a schism between the interests of those who owned the firm and those who were trusted to manage it. What are the lessons we must learn?
First, shareholders, and the asset managers and pension funds acting on their behalf, must be able to coordinate and provide constructive challenge in public and in private. The fragmentation of shareholders can leave senior executives unrestrained – as was the case with Fred Goodwin at RBS. The number of instances where investors work together to steer companies in which they have an inherent collective interest are far too scarce. So we must urgently review the ‘acting in concert’ rules to ensure they are fit for purpose.
Second, the remuneration consultants who advise on executive pay should not be appointed by the managers themselves. Such consultants should be appointed by shareholders, who ought to have a wholly different interest in ensuring pay genuinely matches real performance.
Third, successful firms are those who pursue an inclusive approach, motivating all staff throughout the company. So the representation of workers on remuneration committees is not just about keeping check on senior pay – it is about proving that all employees are valued and rewarded fairly.
Ed Miliband was right to kickstart this debate at last year’s party conference. A piecemeal approach to executive pay and corporate governance from the Tories simply will not do. They have failed to repeat the bank bonus tax and refused to implement the legislation already on the statute book for transparency of rewards over £1m. Labour’s agenda would radically transform corporate culture for the better, with stronger economic performance as a result.
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Chris Leslie MP is the shadow financial secretary to the Treasury
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As the managers of pension funds, etc, often come from the same stable as the directors, and as many shareholders, eg hedge funds, show little strategic interest in companies, we need to go much further than this. How about empowering beneficiaries, for starters, and restricting voting rights to long-term shareholders for seconds?
Chris Leslie is plainly too embarrassed openly to advocate the presence of employee representatives on boards or remuneration committees; he sneaks a drastically reduced version of the Bullock Report on Industrial Democracy (CMd 6706) into his 5th paragraph. Since the advent of Limited Liability, it has always been likely, and has overwhelmingly been the case, that shareholders are too disparate and remote from each other to exercise steady, or even regular, scrutiny over senior management.
{{ The exception is the odd sporadic emotional spasm, resembling a lynch mob more than a pressure group, let alone a major social interest; the witch-hunting of Stephen Hester’s bonus is a good example.}}
Pace Roy Boffy, the same dispersion characterizes pensioner beneficiaries. Consumer, as distinct from producer, interests are best served by product competition, in a market where free entry of new competitors reduces the likelihood that established producers tend to cartels, a tendency immensely increased by licensing and most forms of regulation..