You know that Spring – and the AGM season – has arrived when the first newspaper articles expressing outrage at directors’ pay appear. They are as reliable an indicator as daffodils.
Calls for something to be done to rein in perceived excessive pay to directors of listed companies have been an annual event since the mid-1990s, when pigs were paraded at the British Gas AGM. And efforts to address the issue have been going on almost as long.
The first of these was the Greenbury Report in 1995, which encouraged voluntary reporting on remuneration packages. In 2002 the then government decided that was not sufficient and introduced compulsory reporting and an advisory vote for shareholders. In 2013 that was strengthened further with the introduction of a binding vote on remuneration policies and even more reporting.
Despite this, pay – and outrage – remains high. Regulation is perceived as having failed.
Part of the reason for that perception is a mismatch between the stated objectives that the regulation is intended to deliver, and what public expectations and political rhetoric might lead you to believe those objectives are.
Generally speaking, the objective of using reporting requirements is to change companies’ behaviour through market discipline – giving investors the information they need to decide whether they wish to entrust their money to that company – and/or by ‘naming and shaming’ them into changing their ways.
There was probably some hope that the extra reporting might have a shaming effect. But ‘naming and shaming’ only works if those being named are capable of feeling shame, or at least some slight embarrassment. It appears that not all CEOs do.
In any event, that was not the ‘official’ objective of the 2013 reforms. According to the government’s consultation document, that was ‘to promote an improved dialogue between companies and those that invest in them and a greater symmetry between pay and performance’.
Measured against that objective, there has arguably been some positive impact. If you analyse the so-called ‘shareholder revolt’ of 2014, when some remuneration policies were voted down, you will find that it was not a generalised expression of anger about overall levels of pay, but that dissent was targeted at those companies where investors believed pay and performance were out of kilter.
Given the regulatory approach taken, that is probably the most you can expect. The job of ‘disciplining’ companies was given to investors. The role of investors is look after the long-term interests of their clients and beneficiaries, not to represent public opinion. The two may often coincide, but investors do not have a duty to act in the public interest.
That job belongs to regulators and governments. There are some very direct ways in which they could intervene to reduce pay if that they wanted to use them – wage caps, for example. Understandably, many of those possible actions are considered politically unpalatable and have huge potential for unintended consequences. So they tend not to be used – some limits on bankers’ bonuses courtesy of the EU being a notable exception.
This leaves just the reporting and voting requirements, and an expectations gap between what the public thinks should be done and what can realistically be expected to be achieved through public reporting and shareholder action. A gap that is unlikely to be closed without a change of approach.
|Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance.|