“Restoring Responsible Ownership” is the title of a paper published today by Chris Philp, M.P., on the topic of “Ending the Ownerless Corporation and Controlling Executive Pay”. Many people, including ShareSoc, have pointed out the problems in the current governance of public companies. Professor John Kay covered many of the issues in his admirable review of how the stock market operates in his Kay Review a few years ago. One of the symptoms has been rapidly rising director pay as institutions seem unable to exercise restraint over that even after they were given binding votes on pay by Vince Cable. This has led to ever widening inequality between the pay of directors and of other workers, and has of course eroded the returns to shareholders in some cases.
In other words, shareholders have not been acting in their traditional role as owners of the business to stop managers acting in their interests rather than that of the company, its investors or other stakeholders. This problem has been compounded by the decline in the number of private shareholders directly owning shares, and their disenfranchisement by the nominee system, while institutional fund managers seem to often have little interest in interfering in the management of companies or controlling what the directors pay themselves.
Lord Myners spells out the problems in the Introduction to this paper where he says: “Shares became evidence of an ownership claim rather than acknowledgement of ownership responsibilities and obligations. The mentality of share investors switched from that of a car owner to a car renter. The owner services his car, maintains it in good condition, drives it carefully and relies on it. The renter does none of these things. Institutional investors are the equivalent of renters. They are driven by the short term with qualified interest in the long term, largely as a result of client focus on short term performance versus a diversified index or benchmark.”
What is the solution to these problems? The paper proposes the adoption of “Shareholder Committees”. These are not a new idea. It is in use in other countries and ShareSoc has published a previous paper on this topic – see https://www.sharesoc.org/Shareholder%20Committees.pdf . Chris Philp’s paper suggests one particular version and he has clearly had considerable advice on the subject so as to form what is a practical proposition. Some of the key points are:
- A Shareholder Committee would be mandatory and would consist of the top 5 shareholders, the company Chairman and an employee (not union representative) – the latter two would be non voting.
- The Committee would exercise three powers: a) It would replace the Nomination Committee in recommending the appointment and removal of directors; b) It would ratify the pay policy and actual pay packages proposed by the Remuneration Committee before they go to a vote at the AGM; and c) It could pose questions to the board which must be answered on strategy and corporate performance.
The paper also proposes the mandatory publication of pay ratios (CEO remuneration to median worker pay) plus an annual binding vote on pay (besides the current vote every 3 years).
Comment: These proposals would certainly be a step in the right direction if institutional investors can be persuaded to actively participate in such committees and the problem of them incidentally becoming “insiders” can be resolved. The paper does cover the possible objections by asset managers and companies to these proposals who might well be resistant to change. But such arrangements clearly do work in other countries.
However, would it not also be helpful to have a representative of private shareholders on such committees? Private shareholders have more direct interests in companies and hence have a strong interest in curbing the excesses of management that we see at present.
As regards publication of pay ratios, it might highlight the worst anomalies but there are many different kinds of companies with different ratios, and it would be an easy statistic to manipulate. Is it really necessary to see the ratios to deduce whether one considers the pay of a CEO to be reasonable or not?
In summary though, the Government should surely consider these proposals as a step to bringing companies and their directors under better control so that the role of public companies is seen as less socially divisive.
The full paper can be read here (it is refreshingly short and concise):
http://highpaycentre.org/files/Restoring_Responsible_Ownership_-_Chris_Philp_HPC_copy.pdf
Do let ShareSoc have your comments on this paper so that we can consider our stance on this proposal in more detail.
Roger Lawson
I’m not sure a soviet system comprising the 5 usual suspects is any improvement over the status quo – I think individual shareholders, local authorities and AMNT would be very dubious that BlackRock really represents their interests.
· But if we are going to end up with other stakeholders represented on boards then naturally the big beasts will want to be in the driving seat so that the others tag along – I certainly don’t see that as an improvement.
· We all know what a great job the usual suspects have done on governance and ESG in recent years – suddenly they are going to be transformed by these new powers when they haven’t used the ones they’ve already got?
– It’s not clear if any of the writers understand directors’ duties to the company – clarification of their fiduciary duties would probably help – and also the Law Commission’s study of trustees duties.
NEDs are meant to be doing what this new committee of 5 shareholders are going to do. We don’t need both and to propose that means they are also proposing to add more costs into the ownership system, and more scope for complexity and hence inefficiencies. If NEDs are failing to do this then their job needs to be redefined and/or they need to be replaced. For FTSE100 companies, fewer NEDs getting more involved and possibly doing more work might be a better solution.
The writers have failed to distinguish between the owners of the shares and the fund managers. They are trying to expropriate further power for fund managers. This is dangerous and should be resisted.
According to ShareSoc data, individuals own 30% of the LSE stockmarket (12% directly and the rest via other investments. At the end of 2014, and based on “beneficial” ownership, the Office of National Statistics indicated that individuals held 11.9% by value of shares listed on the LSE. That compares with 16.0% held by pension funds, insurance companies and other financial institutions. But 53.8% of shares were held by foreign investors, which presumably would also be mainly held by institutions. Many people have questioned the individuals figure and believe it is substantially higher if shares held in nominee accounts (such as ISAs) were properly taken into account although the ONS does try to assign the beneficial ownership of those. However, assuming the measures were consistent, it is worth pointing out that after a long term decline (it was as high as 20% in 1994 for example), it rose between 2012 and 2014. Other evidence was a submission by APCIMS to the Kay Review (based on work by Cass Business School in 2011) which suggested that retail shareholders accounted for about 30% of the ownership of FTSE100 companies although it seems likely they took indirect ownership via unit trusts, OEICs, investment trusts and personal pensions into account. It is possible that the aforementioned trend simply represents the migration of shareholders into nominee accounts and into funds and SIPPs. It is likely the 30% is a more accurate representation of the interest of individuals in stock market investment.)
Individuals will be disenfranchised by this proposal and it needs to be firmly opposed in its current form. Roger is right when he says that there should be a representative of individual shareholders on the Shareholders Committee.
One advantage of the proposed arrangement is that it would enable institutions to comment on pay (or block proposals) in private, and before it gets published and voted upon when it is really too late. Also of course the power to appoint/remove directors could have a major influence on the remuneration committee!
Roger Lawson
For either employee or individual shareholder representatives I’d be sceptical about who they would be and how they would be chosen. On one hand they might just be out of their depth – I’ve been a shareholder for many years but I doubt I could add anything useful to such a body, although I might be happy to pick up £10k a year plus expenses for attending! Conversely they might well turn out to be activists representing some specific constituency.