Shareholder revolt is no Arab spring

In: Uncategorized

14 May 2012

This is my latest column for Fund Strategy

The recent wave of shareholder action against high executive remuneration has been widely welcomed as a brave “shareholder spring” against corporate excess. It would be more accurate to see it as a moralistic outburst and a damaging evasion from grappling with real economic problems.

It should be immediately clear that the implied parallel with the Arab spring is absurd. At the time of writing no fund managers had been shot dead or run over by armoured vehicles at any annual general meetings (AGMs). On the contrary, shareholder activists were fawned over by politicians and journalists.

But the more damaging aspects of the campaign against executive remuneration are not so apparent. The argument that poorly performing chief executives should not get large pay rises seems unimpeachable. To see why the broader initiative is flawed it is necessary to look at it more closely.

It is true that many companies, including high profile names, have faced a wave of investor dissatisfaction at recent AGMs. The central complaint is that the high remuneration many executives have awarded themselves is not merited.

Many FTSE 100 companies are among those that have faced investor wrath including Aviva, AstraZeneca and Barclays. High profile casualties have included David Brennan, the chief executive of AstraZeneca, and Sly Bailey, the chief executive of the Trinity Mirror newspaper group, who have both announced plans to step down. Andrew Moss, the chief executive of Aviva, has already agreed to stand down. This all follows the decision earlier in the year by Stephen Hester, the chief executive of the Royal Bank of Scotland, to forego a bonus of nearly £1m after considerable public pressure.

On the face of it campaigns against excessive remuneration have a point. At an aggregate level the remuneration of chief executives at large firms has outpaced the FTSE 100 for many years. For example, a report from the department for business reported that median total remuneration of FTSE 100 chief executives rose over four-fold, from an average of £1m to £4.2m, for the period 2008-10. Yet the FTSE fell slightly over that period.

It is also possible to find many companies, where a similar trend is apparent. The firm has performed poorly by many metrics yet the chief executive has enjoyed a handsome pay rise.

There may be instances when such disparities can be justified. Perhaps a chief executive could argue that a company would have done even worse if he had not been in charge. Or maybe it was hit by circumstances beyond its control.

But the principle that executives should not be richly rewarded for poor performance has a strong common sense appeal. It is hard to imagine even the most pro-business conservative defending high rewards for lousy performance. On the contrary, conservatives are among the harshest critics of such behaviour.

It is precisely the easy character of the target that should be a warning sign. When politicians and others put so much effort making populist attacks on already unpopular figures it should be clear that something is up.

The campaign against excessive executive pay has strong political backing from all three of the main parties. David Cameron has appeared on television arguing that unmerited rewards for executives are unacceptable. The government’s point man on the topic, Vince Cable, the business secretary, has often attacked excessive remuneration. His Labour shadow, Chuka Umunna, is hardly less strident. Last week’s queen’s speech also announced legislation giving shareholders in public companies more say over executive pay.

Other high-profile critics of corporate governance practices come from a variety of backgrounds. They include fund managers such as Michelle Edkins, the global head of corporate governance at BlackRock, as well as campaigning outfits such as FairPensions (which itself is backed by organisations such as Amnesty International, Greenpeace, Oxfam, Unison and the WWF). There is also a think tank, the High Pay Centre, working on remuneration specifically.

In the case of politicians it is easy to detect a vested interest at work in their railing against excess remuneration. Focusing on errant chief executives, as with bankers too, helps to move the discussion away from the political culpability for Britain’s economic morass. It is much easier to moralise than to explain the country’s lack of economic durability or the absence of a credible recovery plan.

But even in relation to politicians this is not the whole story and others involved do not share such a vested interest. The focus on high executive pay draws on a sense that the economic crisis was caused by excess. Its proponents have often drawn the incorrect conclusion that excessive ambition got Britain into its economic plight in the first place and bold initiatives are only likely to make matters worse. What in earlier times would have been seen as aspiration and ambition is recast as greed.

This discussion diverts attention from a serious discussion of the causes of economic weakness. It fails to grapple with the lack of investment in the economy along with low levels of research and development. There is little recognition that signs of economic lethargy were apparent long before the emergence of the financial crisis in 2007-08. Whatever the alleged moral failings of certain business leaders they are only a small footnote in the overall story.

That also explains why the obsession with executive pay is so damaging. It diverts attention from any serious discussion of how to tackle the country’s economic weaknesses. There is little recognition of the need to restructure the economy to create the basis for a new round of productive investment.

Instead it implicitly draws suspicion on anyone who is ambitious and aspirational. The qualities that could help promote a recovery are stigmatised. A deadening culture of caution is consolidated. The result is not so much a shareholder spring as a chilly autumn of economic stagnation.