I need not mention the economic, political, and social outrage that has aroused as a result of what has been termed as “excessive remuneration” of directors against the backdrop of a catastrophic global financial crisis and the well-known scandals that have usurped public trust from some of the most vital organisations to a capitalist society – such mentions have been adequately made within this very blog and across the media with great focus. It it appropriate, however, to refer readers back to the September 2011 Department for Business Innovation and Skills (BIS) consultation on executive remuneration which highlighted a problems with both the excessive levels of remuneration and a transparency deficit within the current pay-setting process.
Against this very backdrop of a deficit in transparency, the question that has to be asked is how such a fundamental reform, hoping to disarm shareholders of the advisory remuneration report and arm them instead with a binding vote, can be expected to succeed and prove its efficiency if it is initiated from an only partly-truthful consultation. The consultation cited Cai and Walkling (Journal of Financial and Quantitative Analysis, 2009, 299) as authority that where shareholders had actively contested a remuneration report with the use of their advisory vote there was a general material reduction in the levels of future remuneration within the company. However, what evidences a lack of transparency or manipulation of the full picture is that the consultation makes no mention of findings by the same authors (in the same article) that such a reduction was meaningless in a mission aimed at tackling excessive remuneration because shareholders were generally not targeting those companies where directors would be perceived to have excessive levels of remuneration but were in fact targeting large companies as wholesale practice. Such a finding by Cai and Walkling significantly dilutes the proposition that shareholders are appropriate arbiters of excessive remuneration.
As the Enterprise and Regulatory Reform Bill (2012), which contained the proposal of giving shareholders a binding vote, sees the writing of draft legislation on the matter; the level of concern within the media and academic field has not been alleviated. Numerous extensive studies have highlighted the lack of shareholder activism for various reasons, including dispersed ownership and the fact that certain shareholders wear two hats (often providing services to a company) and feel shareholder activism could jeopardise other interests, it would seem the Government has not given such findings that weighting the deserve.
Where is a reform based on half-disclosed truths likely to head but trouble?