Shareholders are getting used to Lord Myners, the UK’s Financial Services Secretary, exhorting them to act responsibly, but his speech at the National Association of Pension Funds recent corporate governance seminar reveals some new insights.
Drawing on remuneration surveys from both sides of the Atlantic, Myners noted that in as little as a decade, executive pay multipliers have grown from 50 to over 80 times the average worker’s salary in the UK and 20 times to 250 times in the US (albeit over different time frames). Compared with modern management guru Peter Drucker’s estimates of 20 times being “appropriate”, the unchecked growth seems alarming.
Rather than any compelling economic theory at work, Myners asserted that the absence of active ownership and the professionalisation of the non-executive director role may be the two leading culprits: “It seems to me that one explanation that sits comfortably with observed behaviour is the absence of an effective voice of ownership, as a consequence of multiple changes that have weakened the relationship between shareholders and companies, including internationalisation of ownership and increased investment portfolio diversification, leading to a diminishing interest in company specific governance.
It is also possible that the professionalisation of the non-executive component of Boards, through the increasing appointment of candidates who are either currently, or recently have been, executives of other public companies, has reduced challenge around compensation; and increased the tendency to look at matters from a limited perspective, rather than from the broader lens that would come from directors from more diverse (and less well rewarded) backgrounds.”
“If UK banks had reduced dividend payout ratios by a third between 2000 to 2007, £20bn of extra capital would have been generated. Had payouts to staff been trimmed by 10%, a further £50bn in capital would have been saved. And if banks had been restricted from paying dividends in the event of an annual loss, £15bn would have been added to the pot. In other words, three modest changes in payout behaviour would have generated more capital than was supplied by the UK government during the crisis.”
Source: Andy Haldane of the Bank of England
But with just a few months left before a change of Government, Lord Myners can now do little more than re-iterate his long held view that voting is a fiduciary act and that trustees have a legal obligation to hold their agents to account. Such exhortations can sometimes back-fire – the last thing that active and engaged owners want to see now is an explosion of compliance-driven box ticking without a quality-driven decision making system behind it.