May 4, 2012
Hot on the heels of the controversy at Barclay’s Bank’s AGM last week comes news of a major revolt at Aviva where nearly 60% of shareholders refused to back boardroom pay deals after a 30% fall in the price of the insurer’s shares.
This surely the first of many high profile shows of shareholder strength. The abiding lesson here is that any AGM vote to overturn a Remuneration Committee recommendation must be binding. Like most Conservative MPs, only a few years ago I cannot imagine that I would have been open minded to the notion of government interference in the remuneration of privately owned companies. However, when Vince Cable announced to parliament in January that the coalition government would rapidly move towards legislating to give shareholders control over the ‘excesses of capitalism’ and clamp down on the ‘rewards for failure’, I found myself (for once!) agreeing with him.
Perhaps more than any other, my own constituency, the Cities of London and Westminster, benefited from the boom. Yet I had noticed long before the crisis a growing sense of despair and resentment among hard working Londoners. To their surprise, many highly educated professionals working outside the gilded corridors of financial services had started to feel they were losing out, the growth of the City having merely increased the cost of living and reduced to a wistful dream any prospect of getting on the housing ladder. Having then to bail out the financial services sector, which had previously been so keen to keep regulation and government interference to a minimum, was met with disgust by this cohort.
It has been a feeling replicated across many Western societies where stagnant incomes had hitherto been disguised by an expansion of debt. What has emerged in the years since is a middle class revolt over the unequal rewards to labour and talent that has most recently coalesced around the issue of pay and bonuses. The challenge for those whose instincts are for free markets, enterprise and unequivocal support for capitalism, is whether we should side with the rich or sympathise with ‘our people’, the strivers who seem so shut out from the colossal rewards given to the financial and business elite. For the gap no longer seems between the richest and the poorest but between the rich and everyone else.
I suspect many Conservatives feel similarly conflicted. Our political principles make us instinctively suspicious of the interfering hand of government. Yet it sits uneasily that a certain portion of the population is being remunerated at a level that seemingly distorts the links between talent, hard work and reward. Normally this can be reconciled by the fact that to be a top dog is to take on an extra level of responsibility and, most crucially, risk. However time and again in recent years, we have seen a lack of accountability through the awarding of financial riches regardless of performance, and frequently for failure or engaging in immoral practices. This has utterly undermined trust in the system, the ingredient most crucial to the proper lubrication of our economy. In addition, the rewards in particular sectors have often been so great as to suck talent from other productive areas of the economy.
Looking at pay is therefore not about satiating the envy of the left but a question of whether the remuneration of the richest is starting to undermine capitalism. Indeed it is a primary reason why capitalism itself has been the big theme so far of 2012. It is a debate that my Party is quite rightly embracing and one which, I must confess, I would not have dreamt of touching until the financial crisis came to light. As Roger Bootle of Capital Economics suggests, “If supporters of markets fail to acknowledge their limitations and fail to address the areas of market failure, then they will undermine the case for markets overall and risk losing the wider battle against the champions of egalitarianism and state bureaucracy.”
It is vital that this important debate is framed correctly. That means destroying some of the popular myths being mooted, such as the crossover between remuneration committees on FTSE 250 Boards creating a ‘you scratch my back’ culture or pay rises in a particular year being linked to share increases for that same year. In fact, most are backward looking. In entering the fray with specific proposals on controlling executive pay, I was a little depressed that Vince Cable’s initial focus had been on headline figures for the highest paid, how we might get more women onto boards and how employees might get more of a say in the pay of their bosses. I should prefer instead for the government to look at how we can best ensure that failure bears a cost.
It is for this reason that I found coverage earlier this year of Stephen Hester’s RBS pay packet so depressing. Stephen Hester was brought in as a trouble shooter to run RBS after it crashed. Given the mess left behind by Sir Fred Goodwin, and his handsome rewards for failure, it was understandable that Mr Hester might expect a remuneration package that would reflect the mighty challenge of dealing with an organisation that had previously posted Britain’s largest ever corporate loss. As a result, the overall financial package was geared to attract someone of his calibre – indeed he had previously been Chief Executive of British Land on a financial package that dwarfed the sums currently the subject of such fierce controversy.
My public advocacy for Mr Hester is not inconsistent with my support for a change in how we view executive pay. I have no problem with good people being paid top dollar – so long as they deliver over the long term and the short. Similarly the disincentives for failure must be set high. That might entail looking at how corporate UK might tackle handsome dismissal packages for ineffective executives, commence equitable claw-back schemes for unwarranted rewards (Sir Fred Goodwin’s pension springs to mind) and make shareholders – particularly large, institutional shareholders who must be more than just absentee landlords – more effective in insisting that earnings reflect reality.
Above all, whatever measures the government eventually enacts, it is essential that they are practical, effective and workable. Similarly, this must not detract from the overriding message that the UK is a place that is unashamedly open for businesses and is keen to promote inward investment from the developing world, much of which will regard regulatory tinkering with suspicion.
On a positive note there is already some evidence to suggest that merely by opening this debate, the government is beginning to affect attitudes and behaviours. Simon Walker, director-general of the Institute of Directors, suggested in March that ‘it is time for big FTSE companies to recognise that, in absolute terms, executive pay is excessive’. He believes it damages our social fabric, hurts investment and distorts the balance between management and shareholders. Perhaps the way forward is to encourage senior remuneration committees to suggest publicly what they consider to be a ‘fair rate’ and what is simply too much. Naturally ‘fairness’ is subjective but getting executives now to start developing a set of credit parameters might be the way forward.
Pension funds and insurers together control fewer than 14 per cent of British shares, compared to a peak of about 45 per cent in 1997. Nevertheless, heavy hitters such as M&G, Aviva and Standard Life remain a formidable presence in the share register of most of Britain’s biggest companies and their fund managers tend to be consulted by companies before their AGMs. These institutional shareholders are starting to flex their muscle. The Financial Times reported last month, for instance, the growing gap between what corporate board members and investors feel is a reasonable reward for top management. While the majority of FTSE 350 company boards are content with levels of pay, some in the fund manager world are breaking ranks.
F&C Investments revealed in March that they took a much tougher stance in 2011 by voting against management on remuneration in one fifth of cases. It used its might particularly in banking remuneration where they felt pay was not being aligned with performance. Similarly, Hermes, BT’s pension scheme (the UK’s largest) said there was a need for simpler and longer term incentive structures, and for directors and senior managers to get the same pay rises as other employees. They cited the increasing body of academic research which suggests that performance pay does not work and executive bonuses are almost universally bad news.
Could it be that the government’s activity has given such players the courage to challenge the status quo? Or are they simply anxious to demonstrate they can get their own house in order without any need for fresh regulation? That only 27% of shareholders voted against Barclay’s remuneration report at last week’s AGM is being held up as an example of misplaced hope in shareholder activism. After all, surely failure by those shareholders to unite against a bank whose bonus pool represented three times the amount awarded to shareholders in dividends, represents their limitations. Nevertheless, with increased media coverage, increased public pressure, the possibility of internet-led campaigns and the mood of the times with its appetite for transparency, I would suggest change is afoot, no matter how incremental it may seem at the moment.
No government’s role in any of this should be to decree a cap or decrease in salary levels. The success or failure of this policy must not be measured by how much FTSE chiefs are taking home year on year. Rather its primary aim must be to restore a sense of integrity and justice to the system so that Britons can once again have faith that talent, hard work and innovation are the fastest routes to prosperity. I suspect that unless and until the Coalition provides strong, practical support to those disillusioned by the inequitable rewards for failure, its attacks on crony capitalism and corporate greed will seem simply warm words and gesture politics.