Text of Simon Walker Bob Gavron Memorial Lecture
Here is the full text of the speech given by Simon Walker at the IoD for the inaugural Bob Gavron Memorial Lecture
Good Evening and thank you all for being here tonight.
It is a real honour to be invited to deliver the inaugural Gavron lecture for the High Pay Centre, named for Lord Gavron, or Bob as he was universally known.
His obituary in The Guardian last year noted “The defining characteristic of Bob’s private life was his happy marriage in 1989 to Katharine (nee Macnair), known as Kate” and I’m particularly pleased that we’re able to welcome Kate Gavron in the audience tonight.
Bob achieved many things over a long and impressive career, including serving as a Labour Peer and Chairman of the Guardian Media Group. He was an enthusiastic patron of the arts, in particular literature, chairing the Folio Society for over 25 years.
But before all of this, Bob was a businessman.
After training as a barrister, he abandoned this stable path for the less certain, but more exciting allure of being his own boss.
With an initial investment of just £5,000, he founded the St Ives printing company in 1964. Over the next twenty years he oversaw rapid expansion at the business, culminating in a stock market listing in 1985.
One thing that characterises entrepreneurs perhaps more than anything else is the desire to cause disruption. Bob had worked in the printing industry for several years before founding St Ives, and had come to the conclusion that “most printers regard[ed] customers as a nuisance”, and that there was space for a new player who did things differently.
It’s now taken for granted that companies succeed by focussing on the needs of their customers, but Bob’s insight was a challenge to the corporatist mindset of the times. Entrepreneurs are often great story-tellers, and their favourite stories reflect David and Goliath, the plucky upstart who takes down the complacent giant.
This, I think, gets to the heart of why the public esteem successful entrepreneurs, but treats the leaders of big corporations with suspicion.
It’s not behaviour. While I acknowledge his accomplishments, Lord Sugar’s abrasive performances on The Apprentice is completely out of keeping with the behaviour of most business leaders.
It is a performance of course, for the cameras – I understand that having begun my career in television – and should not be confused with how seriously most corporations now take the practice of positive management.
It’s not character. Normally negative characteristics like aggression and unpredictability can be seen as positives – just look at Donald Trump.
So if it’s not personality that divides entrepreneurs and corporate leaders, what is it? For me, the answer is personal risk.
The subject of this speech is high pay and if I have dwelt on the difference between entrepreneurship and corporatism, it is because I want to set out my stall early on: I have no problem with high pay per se. If you start a company from scratch and turn it into a world-leader, you should be entitled to the rewards.
Our market-based economic system has one overriding strength to it, and that is that the opportunity to succeed encourages adventurous people to try new, disruptive things. Occasionally this leads to their acquiring vast fortunes. Some people may not like this, but remove that incentive, and society would stand still.
The problem is that over the past few decades the senior executives of large public firms have defined themselves as David, when they are in fact Goliath. Of course large companies have continuously to innovate or they will be overtaken – no business has an inherent right to exist. But increasingly managers have assumed massive reward while taking little of the personal risk.
This is not a new problem. Back in 2012, as Lord Gavron pointed out in the House of Lords, “the directors of our public companies have soared ahead to the extent that they are paid up to 50 times as much as their former peers, some even more than that”.
The High Pay Centre was founded even earlier, following the launch of the High Pay Commission in 2009. So business leaders can’t say they haven't had warning this topic was rising up the agenda.
It was a conversation with Ed Balls that led me to start speaking out on the subject not long after I joined the IoD. He was against regulating executive pay and he believed that was true of most MPs on both sides of the house. But public and media pressure can make most politicians intervene on topics they knew were no business of government.
If manifest excess continued to incite public outrage - and the Daily Mail went on enough - even a Conservative Government would be forced to legislate on pay. I checked with some Conservative MPs and he was clearly right.
So it didn't surprise me that Theresa May talked about pay in her first remarks from the steps of No 10.
Last week at the CBI annual conference, she drew a direct link between the Brexit vote in the summer and popular distrust of businesses.
The collapse of BHS, the allegations of staff mistreatment at Sports Direct, and the antics of their respective bosses, Philip Green and Mike Ashley, in mid-June in front of parliamentary committees, I suspect provided a boost for the Leave campaign. Nor should we disregard the impact of bumper pay deals at listed companies, a story which has been bubbling under the surface for years, with untimely eruptions.
Earlier I mentioned Donald Trump, who also profited from a general feeling, that corporations cared little about their communities.
In fact, one of the most remarkable things about that remarkable Presidential election was the way in which a man, born to wealth and living in a tower with a gold elevator, managed to present himself as the champion of the people against the elites. There has never been a more unlikely David than Donald Trump.
What I think both of these seismic shifts show is that large companies have failed to see their enlightened self-interest. I believe the free market is the engine of social progress, raising living standards and generating all the wealth to pay for public goods. But if the public does not feel that the current system is working for them, they will express their will at the ballot box (as Ed Balls knew)
Unless boards show that they are listening, and responding, to the mood of the times, the Government’s trigger finger will just get itchier and itchier. At this point the need for change is a pragmatic, even more than a moral one. I am not talking about hand-wringing or words of contrition, I am talking about corporate awareness actually tempering remuneration decisions.
Interestingly, overall executive pay growth is showing signs of slowing. According to work done by the High Pay Centre, in 2015, the average pay ratio between FTSE 100 CEOs and the average wage of their employees was 147:1, almost unmoved from 2014, when the ratio was 148:1.
And yet, average CEO pay increased considerably last year, rising to £5.5 million in 2015, from £4.9 million in 2014. Digging more deeply, the High Pay Centre found that median CEO pay in 2015 was £4 million, only very slightly up from £3.9 million in 2014. It seems that the increases in average pay are driven by very big pay increases for a small number of CEOs at the top.
There are two trends that I think we need to address. The first is the steady ratchet effect by which every CEO seems to move up, even though inevitably some companies will be doing worse than others. The second is the rise of the ‘superstar CEO’.
There is a widely held perception that company boards are venal places, where fat cats pat each other on the back, nod, wink and set each others’ pay.
In reality, the process and psychology is rather more mundane.
Boardrooms have never been particularly diverse places. It was only really the threat of quotas that pushed the FTSE into appointing more female directors, and there is still a lack of diversity in other fields, including ethnicity, professional background and age.
I’m aware of the irony of a white man on the wrong side of 60 saying this – but unless my genre recognises this, little is going to change.
The absence of diversity of thought means less challenge to the status quo, which is that high pay is the norm and no-one thinks it unusual.
A further problem is that it’s an issue individual directors really don’t want to deal with. Stefan Stern, who kindly asked me to speak today, drew my attention to a comment from Simon Patterson at Pearl Meyer, that the role of remuneration committee chair is “the job everybody wants done but nobody wants to do”.
The result is that the responsibility gets farmed out to remuneration consultants to advise on market levels of pay. No company wants to risk being seen as performing below average by paying their CEO below average levels, so the consequence is an inevitable upwards cry in average pay.
As an aside, this phenomenon of steady upward movement is almost unique to public companies. Ironically many CEOs could actually earn more in private equity, and many move in that direction because they are tired of media scrutiny. But in PE the pay is not guaranteed in the same way; a fat year can be followed by a lean one, directly depending upon the performance of the companies they are managing.
To return to listed companies, the seeming inevitability of executive pay rises at listed companies, especially when general wage growth remains stubbornly slow is, I think, central to public discontent.
For regulators, this is a warning to be careful what you wish for. Publication of directors’ pay was originally introduced to shame companies into moderation, but it has had the opposite effect. Firms have been drawn into competition with each other, and at the top end, pay has become a status symbol.
The growth of the superstar CEO has been fuelled by the desire of boards to believe that their problems can be solved by a rare and magical leader. Paying top dollar becomes proof you have the very best.
Bob Dudley at BP is a seriously talented manager, but even he can’t control the global oil price, and I’m surprised the board didn’t see the outrage coming when they appeared to award him $20 million in a year in which the company made record losses.
Of course, much of the pay award related to previous years and the measurement of pension value, but the lack of awareness, and the inflexibility of the board, was still surprising. It goes back to the issue of personal risk: CEOs are given lots of shares so do well when the company does well, but they also have base pay, bonuses and incentive plans that cushion them in less successful years. A CEO can be transformative – I don’t believe Reuters, where I worked, would have survived if it had not been for Tom Glocer – but not all of them are.
Globalisation and technology have made business, and well as all of our lives, more complicated. The companies listed on the London Stock Exchange are huge, multinational organisations, sometimes employing tens or hundreds of thousands. But are the people running these companies vastly more intelligent or efficient than they were twenty years ago? And another question – would they be any better or worse at the job if they were paid half as much?
The ultimate superstar CEO is of course Martin Sorrell. I admire Martin greatly, he is a rare plc chief executive in that he has more of the characteristics of the entrepreneur – WPP is his creation and life’s work. His total remuneration was over £70 million last year, up from £43 million the year before, and I wonder at this point what function the money really plays: I think it is largely a signifier that he is the best in the business.
I have concentrated on the interaction between boards and CEOs, but I’ve missed out the group of people who should in fact be the most important: shareholders.
While executive pay rose and rose, and public confusion turned into distrust, many in the City shrugged their shoulders and said ‘what does it matter? It’s the shareholders’ money, if they want to get rid of the directors, they can vote them off the board’.
This was based on a public company model, in which investors provide risk capital and have a critical incentive to care about what happens in the business. That assumption is out of date.
Shareholding has become so diffuse, with institutional investors, our pension funds, having so little control, that boards have been left to get on with it – barring the odd takeover tussle. There have been signs of a shareholder re-awakening in recent years, with several rebellions over pay at companies including Weir and Smith & Nephew. But I am unconvinced that the overall mindset has shifted on boards. The vote against executive pay at BP earlier this year was non-binding. It remains to be seen how the board will change things in future.
For some of you the answer to these issues will be more regulation. We are expecting a Government Green Paper on Corporate Governance reform this week.
The Green Paper will cover many of the issues which featured in the Private Members Bill which Bob Gavron introduced in the House of Lords, including pay ratios and binding shareholder votes. The Conservative peer Lord Tugendhat, and Liberal Democrat, Dick Taverne, were both closely involved in what Bob believed ought to be a cross party concern.
Bob would have urged all political parties to come together on these issues. At the IoD we are certainly keen for a frank discussion.
We welcomed Vince Cable’s introduction of a shareholder vote on forward–looking pay policy every three years in the last Parliament, but so far its effect has been limited. We should not wait longer before we move to annual binding votes. It will be resisted by boards, but it is a consequence of their not demonstrating a willingness to be responsive.
I would be careful of expecting regulation to achieve all of your goals. Publishing pay ratios has been heralded as a transformative step, but we have seen the counterintuitive effect of publishing overall pay, and I’m not convinced that the data tells you all that much – is Goldman Sachs a more worthy company than Tesco because it has a lower ratio?
I believe the most useful thing the Government can do – and I’m pleased they are taking a consultative approach – is to force a debate on whether our overall corporate governance system in Britain does what we want.
Back in 1992, the Cadbury report asserted that:
“The effectiveness with which boards discharge their responsibilities determines Britain’s competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability”.
This remains true today, but we must constantly refresh our instructions to listed companies to make sure they are not only competitive, but also maintain an open and innovative economy which works for employees and consumers. Have we got the balance of shareholder power right? In the area of executive pay, I don’t think we have.
In the words of the ageing Don Fabrizio in Giuseppe di Lampedusa’s novel The Leopard: “If we want things to stay as they are, things will have to change”
This was a debate that mattered to Bob Gavron, and we could certainly use his experience and knowledge now.
Bob was part of that section of the Labour party that believes business is part of society, not at war with it – a view which has sadly fallen out of favour.
Those who hold this opinion are now labelled as ‘Blairites’ and their former successes denigrated. But the New Labour insight, that business success is fundamental to a happy society, remains sound.
Although CEOs harrumphed over policies like the minimum wage, the message was clear that business and government shared common goals, and could talk to each other. After Brexit and Trump, business should expect a new level of scrutiny and questioning of their role in society. It would be foolish now for companies to close ranks and defend the high pay status quo. How they react on that issue may prove to be the litmus test for the relationship between business and Government over the next few, rather bumpy, years.
Since 1 January 2019 the average FTSE 100 CEO has earned:
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