The figures are staggering. Total compensation for senior executives and directors has increased as much as 49% over the last few years – while the performance of their companies has not.
Why aren't shareholders staging mass protests through the City of London? Why haven't they occupied the headquarters of companies where senior executive pay has skyrocketed, while the value of their shareholdings has plummeted?
The real reason is that the way shareholders actually vote is through the market.
When they don't like the way companies are run, don't like the policies and the strategies that boards have approved, and ultimately don't believe the company is performing properly, most shareholders simply sell their shares and wipe their hands clean of any involvement.
Selling their holdings puts pressure on a share price, which might prompt boards to take action, but the level of activism a former shareholder has in a company has been lost as they no longer have the right to vote on corporate resolutions.
If any former shareholder feels aggrieved, they might take legal action against a company's management and board decisions. But such litigation is very costly and unless it is done in a coalition with other aggrieved shareholders, most equity participants will shy away from taking these steps.
This is why so many of us with boardroom experience have an uneasy feeling that David Cameron's proposals to allow shareholders the right to veto executive pay deals will not do much to improve the furore over skyrocketing compensation. It feels like a headline-grabbing gesture, timed at the beginning of the year when big City institutions announce bonuses.
There have been similar steps before – the Labour government gave shareholders advisory voting power on remuneration – but very few compensation packages have ever been challenged, let alone voted down.
The effect of these changes is to provide the public with more information about how companies are run and how much pay senior directors earn. From the boardroom perspective, the biggest winners often look to be journalists – who have more information to write about.
Anyone who has attended or participated in the annual general meeting of publicly traded companies knows they are tortuous affairs, often stage-managed by the corporate communications departments and their external advisers. Attendance is often by individuals, who are either children of the company's founder, original shareholders, or former employees who believe the company should operate the way it did decades earlier.
The big institutional shareholders, who generally have the largest stakes, normally exercise their voting rights through the post and those actions are often handled bureaucratically as opposed to actively at an AGM. Moreover, senior executives and non-executives will often meet larger shareholders personally, before public meetings, when they wish to gauge their sentiments on the business or hear a complaint directly. A confrontation at the AGM from a large shareholder would therefore be avoided.
Finally, the globalisation of capital markets has meant that an increasingly larger number of shareholders are not even located in the UK and are not participating in the public debates of the day here – such as excessive executive compensation. Like hedge fund managers, these investors simply buy and sell shares opportunistically. They do not seek any long-term return and are generally uninterested in the political climate of the UK.
Politicians seem to believe that corporate governance should reflect the democratic processes they follow and therefore only seem capable of coming up with ideas that reflect voting and transparency of information. They fail to understand that any solution must change the culture of Britain.
There are much broader policies that could have an impact on executive pay, such as tax incentives that reward long-term shareholding and help avoid the excessive executive turnover which feeds the pay frenzy.
Secondly, regulators could require remuneration committees to be able to detail the competitive processes they follow to ensure that compensation packages are more fully aligned with company results.
Finally, the legal process needs to be reinforced so that senior directors who have been reckless in their oversight and management of an organisation can be charged with a criminal offence.
Excessive pay is a social issue that can best be handled at a big picture level and not solely as a corporate governance problem.
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9 January 2012 3:03PM
Shareholders have always had influence, including at general meetings. They and the markets punish badly-run companies. A costly executive should be seen as being like an expensive piece of manufacturing-equipment. The rest is jealousy and commercial madness.
9 January 2012 3:35PM
Cameron's action are no more than 'window dressing spin'. All part of his program of PR to influence the Mail follower who base the current situation on a few headlines drafted by Central Office.
Cameron will be as ineffective at resolving the pay issue as he was on protecting our borders from illegal immigrants.
9 January 2012 3:41PM
This is a bullseye hit from Cameron. A lot of the big institutions haven't bothered to vote on Remuneration Reports because they knew their votes weren't binding, therefore the whole exercise was no more than a gladitorial display. Any "victory" - where the majority of shareholders voted against - was ignored by the Board of directors, so it looked like a defeat and institutions didn't want their names associated with failure. All that now changes. Any pay award will now be subject to and contingent upon subsequent shareholder ratification: this clearly has pragmatic difficulties if it relates to basic salary, with directors potentially having to repay money back to the company if their basic salary is subsequently voted down as excessive. However, this is not where the problem lies: it's all the lavish "extras" over and above the basic salary that are 90% of the problem.
Cameron now needs to extend the concept to voters voting on the packages of local authority CEOs, Chief Constables etc......
9 January 2012 5:32PM
Excessive pay is a social issue that can best be handled at a big picture level and not solely as a corporate governance problem.
Well ... yes... but in a floppy World, that's a pretty floppy statement.
Obviously greed, contempt, arrogance and near-criminality is rife in the boardrooms of the UK.
A good article would be one showing the rewards for German, French, Italian, Spanish, Brazilian, Australian board members and Senior managers. I feel confident the totals, if not the increases, will show that those countries do not entertain such rabid greed and/or mis-balance
If you have lost workaday moral guidelines; if you have lost representative power; Government pressure systems; Shareholder's backbone - then somebody with ANY degree of willpower has to do something. We are staring at villainy in the face and creeping away like cowards.
CEOs and Directors are well-versed in risk taking and "chesting out" at meetings. We require somebody in Government to risk losing some tosspot from some arrogant corp. You have to go all the way and don't back down... all the way, if necessary, to criminal proceedings and arrest and seizure of assets.
Get the law sorted, bolt it down and apply it. Once all the arseholes are either defeated, bleating or exited, is then maybe the time to review how "draconian" you might have been. Talking shops, massage, and "suggesytions" gets you nowhere with the parasites we have bred in our midst.
It's not "good business" to allow the excess to continue. City of London rewards will just make UK look like a bullshitter's pit to other European corporates - it will increase out infamy, even more than it's renowned for already.
9 January 2012 5:41PM
One day even the Guardian will realise that what 'big institutional investors' are investing is other people's money.
When you invest other people's money, what you care about is what you get out of the transaction. This is usually a fee or a bonus based on the upside risk of rising share prices (where your customer, the future pensioner or unit trust holder, bears the downside risk of falling prices). Your interests are therefore not aligned with those of your customer.
9 January 2012 5:56PM
Look, if Cameron rally wanted to curb Boardroom bonuses (as distinct form basic salary) it would be extremely easy.
And it could be done in such a way as to bring the interests of Board members and shareholders bang in line.
This is how you do it.
1. Limit annual CASH bonus payments to 20% of contract salary.
2. All bonuses beyond this to be paid in shares in the company at MARKET VALUE at the time of the award, deferred for 3 years and exempt from capital gains tax if sold more than 5 years after the initial bonus award.
3. Limit annual executive bonus pool to 20% of annual taxable profits or 50% of shareholder annual dividend payout, which ever is the lower figure.
The trouble is, Dave isn't really that serious about this issue.
He just has a vague understanding that some voters might be, and thinks talking tough is what they want.
It isn't!
9 January 2012 6:05PM
This is an easy one.
Just increase the top rates of income tax.
9 January 2012 6:12PM
The simple answer is to invest your money in funds which follow SRI mandates, are transparent in the way they vote and take a tough line of executive remuneration. That is why I invest all my savings with an institution which publishes how it votes in all shareholder votes for it's equity holdings in it's OEICs on a quarterly basis on it's website which revealed it voted against the 'excessive' remuneration in the all the major UK banks as well as other institutions.
9 January 2012 6:18PM
Obviously greed, contempt, arrogance and near-criminality is rife in the boardrooms of the UK.
The problem is that by and large these are now multi-national companies who happen to list on the FTSE.
The epic larceny occurring in the boardroom is a by-product of a divide and rule national versus globalisation ethos.
Each nation remains in intense competition to house these companies whilst the companies themselves exist outside of all national borders.
They are ethereal entities wholly closed at boardroom level and operating, and investing, at national level only when it suits.
I personally cannot imagine any anglo-saxon government being able to construct a workable social agenda that encompasses the courage to confront these abominations.
Worse, a lot of these thieves appear to want to poison our country by settling here.
9 January 2012 7:06PM
There is only one way of dealing with this unmitigated greed from the boardrooms: Tough legislation with criminal charges automatically applied and prison sentences with confiscation of the proceeds of their greed. With all their army of accountants these greedy men and women will always find a way around everything else. Only making greed a crime has any hope of applying the brakes.
9 January 2012 7:10PM
What a vague sweeping statement. If you can't be more precise and specific you really shouldn't be writing on this. ARM for example has gone up by 437% in the last 5 years, and their CEO's remuneration is very modest.
Whipping up generalised anger with meaningless statistics is not constructive.
9 January 2012 7:50PM
Total compensation for senior executives and directors has increased as much as 49% over the last few years – while the performance of their companies has not
FTSE is up 50% since March 2009.
9 January 2012 8:59PM
Taking on Banks at
http://epetitions.direct.gov.uk/petitions/25638
10 January 2012 8:29AM
Because the vast majority of shares are owned by funds, the managers of which are in on the top pay rip-off.
10 January 2012 9:26AM
and because they are REVOLTING (the bankers I mean)