Monday, 9 January 2012

Papering Over The Cracks on Executive Pay

Many of us were appalled, though not surprised, by the recent IDS report that, at a time when many ordinary people are suffering terrible hardships as a result of the worst recession in generations, the average pay of FTSE 100 directors rose in 2011 by almost 43%, and now averages more than £2m a year.

David Cameron’s response to this (hijacking Ed Miliband’s recent pronouncements on the matter, which themselves owed much to recent LibDem thinking) has been to announce plans to give shareholders binding powers to veto excessive increases in executive pay. It is a feeble response - empowering those with the least stake in a company to act as the brake on executive pay. If you were cynical, you might almost imagine that Cameron is aware that, while his proposals play out well in public, his boardroom allies will have nothing to fear in practice.

It has become obvious in the past couple of decades that the shareholder model (even as reworked by Cameron) – while a good one for raising revenue that allows entrepreneurship to flourish – is not one that guarantees an acceptable level of corporate governance – one that will prevent boardroom excesses that cause workforce resentment and therefore company inefficiency, leading ultimately to a poor deal for the consumer.

Company ownership in the UK (and indeed the US) is one that is predicated on maximising shareholder value. And yet of all the stakeholders in a company, shareholders are the ones whose commitment is the least secure – able as they are, in a moment and with just a few keystrokes, to remove their investment – switching to another vehicle that they think offers a better chance of a quick return. This leads to uncertainty and short termism at every level of company management and contributes nothing to holding directors to account. It should also be said that many companies are owned by corporate shareholders – which themselves have a shareholder constituency to satisfy – leading to a ‘you scratch my back and I’ll scratch your back’ culture. Good governance is the least of their priorities.

Dr Bryn Jones of Bath University has recently written:
"In researching corporations striving to optimise shareholder value, I have found that this aim [for businesses to increase profits in way that creates sustainable shareholder value] often clashed with a business's undertaking to promote social and environmental objectives. In these circumstances, the latter commitments were abandoned. Workers were sacked, community assets stripped and carbon emissions increased by closures and 'offshore' relocations - all in the interests of sustaining 'shareholder value'."
The Greens are the only major political party in the UK that is calling for a fundamental overhaul, advocating measures that should be taken to improve corporate governance so that we do not see such excesses. One policy would be to introduce legislation requiring that the maximum wage in any organisation is no more than ten times its minimum wage.  Another is to ensure that those with the greatest stake in the success of a company – its workforce – are given a governance role by the formation of workers councils – as has become the norm in Germany and other north European countries. Rather than stifling innovation, as many on the Coalition Government's benches suggest, such measures are proven to lead to a more empowered workforce, using its know-how, experience and commitment to the long term to design policies that benefit the corporate body as a whole. This is a factor that has played no small part in the success of those north European economies in recent years.

It is vital for the health of the nation - and not only for the well-being of those who daily have to battle the effects of social deprivation - that there is greater income equality. The neo-liberal economists who have held sway in the developed world over the past couple of decades would have us believe that by using deregulation and tax cuts, the very wealthiest are freed to create additional wealth, which is then invested so that society as a whole benefits - the so-called 'trickle down effect'. The facts however are very different. As Ha-Joon Chang has argued in a recent work: "concentrating income in the hands of the supposed investor ... does not lead to higher growth if the investor fails to invest more." In free market capitalist economies, there are no mechanisms to ensure that investment actually happens. In contrast, in countries with a strong welfare state it is a lot easier to spread the benefits of extra growth that follows from upward income redistribution through taxes and transfers. "In other words, we need the electric pump of the welfare state to make the water at the top trickle down in any significant quantity." Given that in an economic downturn the best way to boost the economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion of their incomes, then now is the time to introduce measures to ensure that wealth is more fairly distributed.

Business as usual is no longer an option. It is time to stop papering over the cracks and introduce real accountability into our boardrooms.