30 December 2009
Why investors cannot be expected to control pay
The below was pasted onto the ft.com website as a comment on the leading article for 30/12/2009(?). The article can be viewed (subscription may be required) at:
http://www.ft.com/cms/s/0/d256c8ca-f4af-11de-9cba-00144feab49a.html
Sadly it is now abundantly clear that action on executive pay must come from governments not from investors. Investors have been struggling to have an impact on this issue for more than 20 years and have failed completely.
One of the main reasons for this is that most shares with voting powers are controlled some kind of professional fund manager. There are many reasons why fund managers can never be effective in controlling executive pay:
- Fund managers are themselves usually very well paid and they benefit from the high pay culture.
- It is easy for a management team under pressure from about executive pay to retaliate, for example by suggesting that the earnings of all fund managers should be made more transparent.
- Investing energy in improving the performance of a company for the benefit of all shareholders does not help an individual fund manager compete with his/her competitors
- Sorting out executive pay is “short term pain for long term gain”. If a fund manager’s performance is measured quarterly then the short term pain shows through straight away, and the manager is unlikely to stay in post long enough to see the long term gain.
- A fund manager making a stand on this issue is likely to lose all his friends and contacts.
- A fund manager taking a stance on executive pay is going to find it far harder to sell his/her services to high paid clients than a fund manager who colludes on pay.
- A management team whose pay is constrained by investors is likely to wriggle! For example they might seek to play off the interests of one set of investors against another. In practice it is impossible for investors to commit the long term persistence necessary. The fact that each only controls a very small shareholding so that co-ordination is required also makes this impossible.
- Professional fund managers often sit in management structures which are headed up by banking executives, insurance executives or other senior executives, often in listed companies. For the fund managers to seek to limit the pay of their own bosses is an obviously bad career move! They are not stupid!
Another problem that investors face is that the standard guidance on this issue of executive pay (The Combined Code on Corporate Governance) was written by highly paid people in order to preserve the interests of highly paid people. From an executive pay perspective it is extremely counter productive. See http://www.freewebs.com/hgerard/FRCCombinedCodeSubmission.pdf .
It is quite clear that the investor route to controlling executive pay has been tried, persevered with, and persevered with again, but can never work. A complete culture change is required. Just as “non smoking pubs” were socially highly desirable, but required a culture change that could not be delivered by the market, so lower executive pay is extremely socially desirable but can only be delivered by carefully co-ordinated government action. It would be all to easy for an individual government to tinker and get it wrong, but a globally agreed (or at least a G20 agreed) cap on pay could provide the culture change required. See http://performanceandreward.blogspot.com/2009/12/case-for-global-cap-on-pay.html .
http://www.ft.com/cms/s/0/d256c8ca-f4af-11de-9cba-00144feab49a.html
Sadly it is now abundantly clear that action on executive pay must come from governments not from investors. Investors have been struggling to have an impact on this issue for more than 20 years and have failed completely.
One of the main reasons for this is that most shares with voting powers are controlled some kind of professional fund manager. There are many reasons why fund managers can never be effective in controlling executive pay:
- Fund managers are themselves usually very well paid and they benefit from the high pay culture.
- It is easy for a management team under pressure from about executive pay to retaliate, for example by suggesting that the earnings of all fund managers should be made more transparent.
- Investing energy in improving the performance of a company for the benefit of all shareholders does not help an individual fund manager compete with his/her competitors
- Sorting out executive pay is “short term pain for long term gain”. If a fund manager’s performance is measured quarterly then the short term pain shows through straight away, and the manager is unlikely to stay in post long enough to see the long term gain.
- A fund manager making a stand on this issue is likely to lose all his friends and contacts.
- A fund manager taking a stance on executive pay is going to find it far harder to sell his/her services to high paid clients than a fund manager who colludes on pay.
- A management team whose pay is constrained by investors is likely to wriggle! For example they might seek to play off the interests of one set of investors against another. In practice it is impossible for investors to commit the long term persistence necessary. The fact that each only controls a very small shareholding so that co-ordination is required also makes this impossible.
- Professional fund managers often sit in management structures which are headed up by banking executives, insurance executives or other senior executives, often in listed companies. For the fund managers to seek to limit the pay of their own bosses is an obviously bad career move! They are not stupid!
Another problem that investors face is that the standard guidance on this issue of executive pay (The Combined Code on Corporate Governance) was written by highly paid people in order to preserve the interests of highly paid people. From an executive pay perspective it is extremely counter productive. See http://www.freewebs.com/hgerard/FRCCombinedCodeSubmission.pdf .
It is quite clear that the investor route to controlling executive pay has been tried, persevered with, and persevered with again, but can never work. A complete culture change is required. Just as “non smoking pubs” were socially highly desirable, but required a culture change that could not be delivered by the market, so lower executive pay is extremely socially desirable but can only be delivered by carefully co-ordinated government action. It would be all to easy for an individual government to tinker and get it wrong, but a globally agreed (or at least a G20 agreed) cap on pay could provide the culture change required. See http://performanceandreward.blogspot.com/2009/12/case-for-global-cap-on-pay.html .
Labels: investors, shareholderactivism
