Half the Truth – Directors’ Remuneration and Government Consultations

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?

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‘Fat Cat’ Pay – Part 1

So, as my dissertation is focussed solely on what has been termed ‘fat-cat’ pay I thought it appropriate to kick-off proceedings with a relatively short and, at this stage, fairly low-level-researched ‘rant’ on w
Unless you’ve resided under a rock recently it will not be breaking news that shareholders and employees alike have greatly condemned the astronomical sums of money that have been handed to senior executives figures of public limited companies (PLCs). The elevated bad publicity of this situation is owed to two factors – low shareholder dividends and employees at the bottom end of the pay scale losing their jobs as PLCs try desperately to cut the operational costs and deal with tough economic times.hat I feel to be the issues.

We’ve seen shareholder revolts for several companies, including market giants Aviva and Barclays. But, this is where the problem begins. The current legal position allows for shareholders to vote against remuneration reports of directors but this vote is not binding. Effectively, this allows directors to ignore any concerns that directors, technically owners of the business that the said directors control, with regards to the level of remuneration.

The UK Department for Business Innovation and Skills has declared that there is potential in making shareholder votes binding. However, is this really going to work? Studies by various scholars and economists, including Martin Conyon, suggest that the shareholder patterns of many UK PLCs are not suited to such binding votes Most shareholders are here today, gone tomorrow, and back the following Monday. Shareholders is in the majority about driving personal profit as opposed to owning shares in a particular organisation. Would a more appropriate course of action be to give a stronger say to employees of PLCS, individuals with a stronger and more permanent connection to the organisation.

Also, is it right to condemn the vast levels of pay? A century ago, in the days of Re Brazilian Rubber Plantations, directors were seen as mere fund raisers with few duties beyond gathering shareholder capital. The situation is very different today, in a global economy with competition for skill being fierce. Equally, shareholders duties have expanded vastly – stakeholders are now made up of not only shareholders, but creditors, employees, the environment and many other constituents. Equally, the disqualification regime, under the Company Directors Disqualification Act 1986, presents a further danger to directors which, without the high-level rewards of vast remuneration, may deter many talented individuals from acting as directors of PLCs.