January 24, 2012
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, Vince Cable announced to parliament yesterday afternoon that the coalition government will rapidly move towards legislating to give shareholders control over the ‘excesses of capitalism’ and clamp down on the ‘rewards for failure’.
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 have 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 we are quite rightly embracing as Conservatives and one which, I must confess, I would not have dreamt of touching until the financial crisis came to light.
Nevertheless if we are to have this debate, it is equally vital that it 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 when they are, in fact, backward looking.
In entering the fray with specific proposals on controlling executive pay, I was a little depressed that Vince Cable’s focus was on headline figures for the highest paid, rather than in devising a scheme to ensure failure bears a cost – tackling handsome dismissal packages for ineffective executives, commencing equitable clawback schemes for unwarranted rewards (Sir Fred Goodwin’s pension springs to mind) and making shareholders – particularly large, institutional shareholders who must be more than just absentee landlords – more effective in insisting that earnings reflect reality.
Above all, whatever he eventually proposes must be practical, effective and workable. More important still, it 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 of this sort with suspicion.
No government’s role in all of this should be to cap or decrease salaries in general. 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. 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 seem like just warm words and gesture politics.