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Manifest: showing, not telling

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Agents watching agents, watching agents, watching agents

The UK’s asset management trade association, The Investment Association (IA) last week released a statement of principles which they believe should determine directors’ remuneration in the UK – although if you were not aware of this you can be forgiven.

Confusingly, the statement does not appear (at time of writing) on the IA’s web site, nor was it distributed by the IA’s normal media channels. Instead it can be found on the web site of IVIS, a shareholder voting research provider owned by the IA following the merger with the ABI’s investment affairs department (other shareholder voting research service providers are available as the website for the signatories to the Best Practice Principles for Shareholder Voting Research highlights http://bppgrp.info).

The forward to the document sets a low bar:  the expectation is that companies will follow legal requirements when reporting on pay. Possibly fair enough, as Manifest demonstrated in its analysis of the 2103 regulations prepared for BIS, there are indeed some areas where companies are failing to comply.

However, that approach continues by repeating what can safely be referenced back to someone else’s work and passing responsibility to everyone else. Harsh? Consider the following:

The the IA view on:

  • the role of shareholders repeats the position of the Companies Act (No Haldane-esque attempt to address how corporate governance of public companies may be of public as well as private interest);
  • responsible ownership deems it outsourced to the FRC’s Stewardship Code; and
  • directors duties simply repeats the provisions of CA 2006.

All of the things which the document says that shareholders should do are already well embedded in the mix of soft and hard regulation which underpins governance of directors remuneration in the UK. In this respect the document is notable by what it doesn’t contain rather than what it does contain.

The IA (IVIS?) paper’s emphasis is on value creation. Value protection – for which the UK’s corporate governance regime is arguably intended – is not mentioned.

Perhaps the biggest omission is a failure to recognise that, despite the fact that all the mitigants and safeguards set out by the IA, there is a persistent problem with executive pay and corporate performance. The whole reason why the IA and many other bodies now go the the trouble of producing documents of this kind is because public company pay matters to the public, right down to the individual savers and pensioners who the IA considers to be its “ultimate” clients.

Repeated examples of egregious pay settlements have eroded public trust in business and indeed in saving and investment. As is clearly demonstrated by peer-reviewed academic evidence (e.g. Heads I Win, Tails You Lose Cambridge Journal of Economics edition here), it is clear that, in general, there has been no correlation between executive pay and performance (as measured by profit) at the UK’s largest listed companies.

Against this backdrop the IA statement is a disappointing rehash of the current failed model for determining executive pay. For all the IA’s talk of remuneration simplification working parties, there is no reason to believe that this latest statement of principles will do anything to change that relationship any more than the past 20 years of trade association “best practice” guidelines.

Further Reading

Dimaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147–160. [online]

Conflicts of Interest Statement:

Dr Ian Gregory Smith (now of University of Sheffield) is a former Manifest employee and the data used in the study was provided on standard commercial terms and we played no part in the study design or review of the conclusions.

The  study performed for BIS was undertaken by current Manifest employees on normal commercial terms.

What do you think?