“Restoring Responsible Ownership” is the title of a paper published today by Chris Philp, M.P., on the topic of “Ending the Ownerless Corporation and Controlling Executive Pay”. Many people, including ShareSoc, have pointed out the problems in the current governance of public companies. Professor John Kay covered many of the issues in his admirable review of how the stock market operates in his Kay Review a few years ago. One of the symptoms has been rapidly rising director pay as institutions seem unable to exercise restraint over that even after they were given binding votes on pay by Vince Cable. This has led to ever widening inequality between the pay of directors and of other workers, and has of course eroded the returns to shareholders in some cases.
In other words, shareholders have not been acting in their traditional role as owners of the business to stop managers acting in their interests rather than that of the company, its investors or other stakeholders. This problem has been compounded by the decline in the number of private shareholders directly owning shares, and their disenfranchisement by the nominee system, while institutional fund managers seem to often have little interest in interfering in the management of companies or controlling what the directors pay themselves.
Lord Myners spells out the problems in the Introduction to this paper where he says: “Shares became evidence of an ownership claim rather than acknowledgement of ownership responsibilities and obligations. The mentality of share investors switched from that of a car owner to a car renter. The owner services his car, maintains it in good condition, drives it carefully and relies on it. The renter does none of these things. Institutional investors are the equivalent of renters. They are driven by the short term with qualified interest in the long term, largely as a result of client focus on short term performance versus a diversified index or benchmark.”
What is the solution to these problems? The paper proposes the adoption of “Shareholder Committees”. These are not a new idea. It is in use in other countries and ShareSoc has published a previous paper on this topic – see https://www.sharesoc.org/Shareholder%20Committees.pdf . Chris Philp’s paper suggests one particular version and he has clearly had considerable advice on the subject so as to form what is a practical proposition. Some of the key points are:
- A Shareholder Committee would be mandatory and would consist of the top 5 shareholders, the company Chairman and an employee (not union representative) – the latter two would be non voting.
- The Committee would exercise three powers: a) It would replace the Nomination Committee in recommending the appointment and removal of directors; b) It would ratify the pay policy and actual pay packages proposed by the Remuneration Committee before they go to a vote at the AGM; and c) It could pose questions to the board which must be answered on strategy and corporate performance.
The paper also proposes the mandatory publication of pay ratios (CEO remuneration to median worker pay) plus an annual binding vote on pay (besides the current vote every 3 years).
Comment: These proposals would certainly be a step in the right direction if institutional investors can be persuaded to actively participate in such committees and the problem of them incidentally becoming “insiders” can be resolved. The paper does cover the possible objections by asset managers and companies to these proposals who might well be resistant to change. But such arrangements clearly do work in other countries.
However, would it not also be helpful to have a representative of private shareholders on such committees? Private shareholders have more direct interests in companies and hence have a strong interest in curbing the excesses of management that we see at present.
As regards publication of pay ratios, it might highlight the worst anomalies but there are many different kinds of companies with different ratios, and it would be an easy statistic to manipulate. Is it really necessary to see the ratios to deduce whether one considers the pay of a CEO to be reasonable or not?
In summary though, the Government should surely consider these proposals as a step to bringing companies and their directors under better control so that the role of public companies is seen as less socially divisive.
The full paper can be read here (it is refreshingly short and concise):
Do let ShareSoc have your comments on this paper so that we can consider our stance on this proposal in more detail.