UK public companies have a problem. They have become what Lord Myners refers to as "Ownerless Corporations". Shareholdings have become fragmented and fund managers are often focused on the short term - which means shareholders often fail to exercise proper oversight of the companies they own.
For capitalism to work, the holders of capital (i.e. shareholders) need to exercise a measure of control and oversight over the companies they own. Absent this, directors may simply run corporations in their own interests. Symptoms of this are escalating executive pay and over-ambitious expansion and takeover plans. This can lead to bad outcomes for the shareholders and for society as a whole.
As a consequence of poor shareholder oversight, total CEO pay in the UK has rocketed, and now stands at around £6 million per year on average, or 150 times average worker income. Public opinion is very firmly of the view that CEO pay is excessive, poorly linked to performance, and counter-productive to staff motivation. The public is right.
The relationship between pay and performance is weak. Between 2000 and 2013 total CEO remuneration grew 233%, but most measures of corporate performance only grew by between 50% and 90% over the same period. At the same time, workers' wages stagnated.
Academic studies have, surprisingly, shown that high executive pay actually leading to relative under-performance. High CEO rewards seems to follow even indifferent or poor performance.
A study published in July 2016 by MSCI found a negative correlation between executive pay levels and performance. Their summary states:
"Has CEO pay reflected long-term stock performance? In a word, "no." Companies that awarded their Chief Executive Officers (CEOs) higher incentives had below-median returns based on a sample of 429 large-cap U.S. companies observed from 2006 to 2015."
Reform is needed. Firstly, there should be mandatory disclosure of the ratio of the CEO total remuneration to median employee pay. Publishing this emphasises the idea that a profitable company sustains all those who worked towards that profit.
Secondly, shareholders in UK listed companies currently only have a binding vote on pay policy once every three years. The actual amount paid to Directors each year is only subject to an advisory vote. Due to the complex nature of performance based pay, the packages actually paid are often in excess of the previously stated maximum, or exceed what shareholders think is reasonable bearing in mind performance. Advisory votes against remuneration are often ignored by Boards. The annual vote on the remuneration report should therefore be made binding.
Finally, Boards have become too detached from their shareholders and other stakeholders. I propose to reform corporate governance by adapting the Swedish concept of a shareholder committee.
A Shareholder Committee (SC) should be mandatory for all UK main-market public companies, comprising the largest five shareholders. If a shareholder declined the option of taking their seat, it would pass to the next largest shareholder. A list of any shareholders declining to take their seat on the SC would be published, so that their own investors could see the opportunity had been declined.
The main Board Chairman and an elected employee representative (not a trade union representative) could both attend and speak at the SC, but not vote.
The SC would exercise the following three powers:
1. Replace the Nomination Committee and recommend the appointment and removal of Directors for a vote of all shareholders at the AGM. This will make Directors more accountable to Shareholders
2. Approve the pay policy and specific pay packages proposed by the Remuneration Committee before they are put to a binding vote of all Shareholders at the AGM.
3. Pose questions to the main Board, including on strategy and performance
By adopting these reforms, shareholders can take more responsibility as custodians of the companies they own. It will better control executive pay, and make for better companies and a better society.
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