What kind of democracy for votes on bosses' pay?

 
Business Secretary Vince Cable Vince Cable wants to bring in measures to curb excessive executive pay

Today's Queen's Speech heralds a constitutional change for the UK's corporate citizens.

The government will amend company law so that shareholder votes on big businesses' prospective remuneration plans for executives will be binding - as opposed to the current system of advisory votes (which have the power to embarrass companies but not to compel them).

When I spoke yesterday to the business secretary Vince Cable, who is championing the reform, he confirmed to me that one point still at issue is the voting threshold which public companies have to exceed for their pay plans to go through.

For the avoidance of doubt, Mr Cable is still actively considering the idea that a simple majority of shareholders in favour of remuneration policy may not be appropriate. For companies to secure approval of the millions they wish to pay their executives, he may require a bigger majority - perhaps 60%, perhaps 75% (he is not specifying).

So why shouldn't the normal democratic rule, that a simple majority is all that's needed for legitimacy, apply here?

Well campaigners on this issue point out that many investors behave like absentee landlords - they never vote, or when they do vote, they unthinkingly vote the way that a company's board recommends.

More specifically, there is overwhelming evidence that companies with large number of shareholders from outside the UK - especially from Asia and the Middle East - have a much better chance of avoiding embarrassing votes on pay plans, because these overseas investors tend to be uninterested and unexcited by remuneration issues.

I am told that one reason why Aviva lost its recent remuneration vote is simply because it had the bad luck to be largely owned by UK investors. Certainly in the long history of egregious or bonkers pay policies, Aviva looks by no means the worst - though it is one of a minuscule number ever to have lost these votes.

Increased engagement

Now, as I have mentioned before, UK investors - especially pensions funds and life companies who manage the savings of millions - are becoming much more engaged with the businesses they own and much less unthinking about the way they vote.

Many would see that as a very good thing. And I think it largely reflects their fears that if they fail to reflect the mood of the public that businesses have to be kept on the straight and narrow, the greater public will decided to take their savings to institutions whose relationship with businesses is more responsible.

So the question is how best to nurture and encourage this transformation of investors from quick-buck merchants into thoughtful stewards - and how also to persuade company boards that they ignore the wishes of their owners at their peril.

Strikingly, the CBI - which represents the interests of big companies - and the ABI, which represents the interests of some big shareholders, have both told Mr Cable that they think the threshold for victory in a remuneration vote should be the conventional one of 50% plus one vote.

One leading fund manager said to me that he feared that if the threshold for success was 75%, as some have suggested, company chairs would have to spend all their time working through the minutiae of company pay policy with shareholders, and too little time setting the wealth-creating strategy of their companies.

Strikingly however the NAPF, which represents pension funds, has given me this nuanced statement:

"The NAPF supports the Government's proposals for a binding vote on future remuneration but has reservations about the practicality of a 75% voting threshold for its approval, based on the practical implications of its introduction, such as the additional power given to a minority block holder.

"However, we do not rule it out completely as it would certainly help focus minds among company boards and investors and be an incentive to early and effective engagement. We therefore suggest that there be a transition period when all parties can evaluate the workings of the new regime with a view to moving to an appropriate threshold once the system has bedded down."

Now I would not be at all surprised if this suck-it-and-see suggestion appealed to Vince Cable. As he said to me yesterday, he is concerned that the current wave of protest votes against excessive executive pay could turn out to be a passing fad - and he therefore wants a constitutional change that would lead to a permanent transformation of big institutional shareholders into properly informed and engaged proprietors.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
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    Comment number 89.

    #88 FauxGeordie - indeed, those that made losses or whose business is no longer viable get no bonuses and lose their jobs.

    Luckily, for me business has never been better. And not propped up by taxpayers by the way - I would benefit from more volatility that would result from some institutional failures.

  • rate this
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    Comment number 88.

    "Finance is one of the fairest and meritocratic industries - your worth is the P&L."

    So - since your whole industry is utterly on the ropes, popped up by the taxpayer and has been fraudulently running up debts to generate phony commissions & fees, presumably the iron logic of the free market means you'll all be taking massive pay cuts.

    Nope. Thought not.

  • rate this
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    Comment number 87.

    Re #83, #85 - Prakash, the level of knowledge, skills and commitment required, and of profits generated, varies by industry, and free market competition ensures pay is at exactly fair level. My management would love to pay me less than they do, but I would not accept it and neither would others who could do it.

    Finance is one of the fairest and meritocratic industries - your worth is the P&L.

  • rate this
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    Comment number 86.

    Part 2: In addition to my previous comment. eg if a company awarded its director £4m, with 10,000 workforce. They reduce the pay pack of the director, the 20% of low end workers with in the organisation could see a pay increase of up to £2000+ each/year, this would along way for low income families.

  • rate this
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    Comment number 85.

    Its not just the director pay that needs reviewing. A massive overhaul in the financial and insurance sector is needed. Forexample a Intermediate Project Manager in Bank would recieve near enough £100k. Same PM in a Telco or FMCG would recieve £40k for doing the same job. Even top nurses and doctors earn less than some of the entry level of these sectors. Something needs to be done.

 

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