Simon Walker (IoD): ‘Shareholders have dropped the ball when it comes to addressing pay’
Full text of Simon Walker's speech (15/04/13)
"Good morning, ladies and gentlemen, Secretary of State, and thank you all for joining us here at the Institute of Directors for this crucial discussion.
For those of you who don’t know us, the Institute of Directors was founded in 1903 to promote successful business in the UK. Our aim for over a century has been to champion best practice in business leadership encourage governments and companies alike to construct a positive environment for private enterprise.
Our mission is emphatically not to simply defend anything that business people might do. It is clear to us that irresponsible activity is just as damaging to capitalism and the free market as anything the anti-capitalists of the world could throw at us.
What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests, or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.
When the ordinary, hard-working people who are the workforce, customer base and often shareholders of our companies see value destroyed in scandals like LIBOR fixing, or the collapse of HBOS, they are shocked. When those who oversaw disasters get multi-million pound payoffs rather than public censure, they are horrified and angry. And rightly so.
We oppose undeserved high pay because it is harmful to business as a whole. That does not mean we oppose high payment when it is deserved. When sustainable, long-term shareholder value is created then that should be recognised and rewarded. What we must do is restore the link between performance and pay.
I think there are some encouraging signs that this is beginning to happen.
The shareholder spring was not just a rhetorical device or a handy media tag; it put the frighteners on a lot of people. The idea that shareholders would actually start taking an activist stance on holding senior executives to account shook things up, and not before time.
For example, basic pay growth for FTSE100 directors slowed by 4.9%. Some moves have moved towards acknowledging the importance of longer-term remuneration at least in principle: such as the large shift towards LTIPS.
However, that clearly is not enough. The main problem with LTIPS is that they are “long-term” in name but not very long-term in reality. Three years is not true long termism when it comes to steering a large corporation. Instead of complex vehicles like LTIPS, we urge companies to split pay simply between fixed and variable rewards. The variable element should be composed of shares which must be held for a significant period of time-at least 5 years-and, crucially must be subject to claw-back clauses.
There are a couple of other encouraging shifts which I’d like to point to which suggest that the pressure is working.
The first is the move to greater transparency by British banks in particular. We now have more information on who is being paid what, and why, and more detailed analysis of the composition of remuneration committees.
Greater openness can only be a good thing: companies must realise that public and shareholder scrutiny is not a threat, it is a helpful force to ensure they are run by consent and in a productive way.
While the publication of less senior executives’ remuneration has produced some shocks - 430 people at RBS and Barclays paid more than £1 million, and that some banks pay 3 times more in executive bonuses than to all shareholders in dividends - it is a crucial step towards establishing a relationship with investors based on trust rather than suspicion.
Then there are the reforms which the Government is introducing. Binding shareholder votes on remuneration, in particular, are a positive step. For too long some companies have been run as though their senior executives own the shop-rather than shareholders. Imagine the power of a shareholder spring working with binding, rather than advisory, votes. I suspect behaviour will change even faster under the new regime.
Of course, this challenge is not just one for government, boards or company management. It is also one for shareholders. It is important to recognise that shareholders have also dropped the ball far too often when it comes to addressing problems with pay.
Some of this is undoubtedly structural: as more shares are held by middleman investors, shareholder activism has fallen. But it is also cultural: a shift to an unhealthy belief that rock star executives should not be challenged.
Both of those trends have proven to be serious mistakes which shareholders and investors have come to rue. Faced with severe losses, no-one likes paying millions of pounds in golden goodbyes to those who were responsible. The bitterness of that experience will linger, I suspect. And the IoD will continue urging shareholders never to put themselves in such a situation again.
To add some perspective: I think it’s mad that members of boy band One Direction each made £5m last year. I think it’s mad that Premier League footballers are routinely paid £10m per year. I don’t believe it’s the government’s job to stop that, but I do believe it is the job of shareholders to stop counter-productive excesses that are in their name. I encourage them to do that."
Since 4 January 2016 the average FTSE 100 CEO has earned:
Income inequality in the UK
Wealth inequality in the UK
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A piece by Stefan Stern in the FT on 21.7.2016
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- Investment Association, Executive Remuneration Working Group
Read our response to the working group's interim report, in which we argue for a fundamental rethink to the principles of executive pay