Shareholders to get binding votes on executive pay under Cable reforms

First up, here’s what Vince had to say in the House of Commons yesterday:

Under the plans, binding shareholder votes on pay and exit payments will take place every three years, but changes in pay policy in the period between votes will also have to be approved by shareholders. Companies will also be required to provide a single pay figure for executives which includes salary, bonuses and long-term incentives, rather than the confusing multitude of different figures that shareholders are often currently presented with.

Cable plans to implement a number of the recommendations of the High Pay Commission, but has rejected others, as the FT reports:

Mr Cable said that forcing companies to put employees on their boards would be “nice in an ideal world”.

“But there is a difference between supporting good process and actually compelling it,” he said. “Quite a few FTSE 100 companies are global companies, would you have to ensure you have got workers from Kazakhstan or Lagos on the board?”

He also defended the coalition’s decision not to impose a maximum ratio between the lowest and highest paid staff in a company. A business that outsourced its low-paid staff would score well on that ratio, he pointed out, as would Goldman Sachs: “Because they are all millionaires.”

Most newspapers have broadly welcomed Cable’s planned reforms, albeit with some specific criticisms.

The Guardian congratulates the business secretary but (unsurprisingly) would have liked him to go further:

There is much here to applaud; but these reforms do not live up to the Liberal Democrat’s image as a fearless campaigner against entrenched economic interests. Indeed, they do not live up to Mr Cable’s own proposals in this area unveiled just a few months ago. What was supposedly a consultation evidently turned into a watering-down exercise. The government’s proposal to give shareholders the power simply to block excessive annual payouts to executives has turned instead into a vote, possibly once every three years, on pay policy. This might appear a small or semantic difference. But the latest version of this proposal carries the risk that shareholders will only get to have a say on vague commitments and virtuous phrases, rather than cold, hard and large numbers. The big-business lobby, the CBI, greeted this dilution as “rightly focus[ing] on board pay strategy, not individual pay packages”. What delights the bosses of big business is precisely what should annoy the rest of us: the focus should be the other way around. Similarly, the business secretary was going to give shareholders a binding vote on the total remuneration for bosses – a big break from the current system where basic salary is categorised separately from bonuses, long-term incentives and pension payouts. That has now been toned down to a mere advisory vote, which the executives can choose to ignore. Finally, an approach centred on giving shareholders more power is over-reliant on well-paid fund managers scrapping with fellow members of the same cosy club.

Those caveats expressed, Mr Cable should be congratulated for making history. He was already the first business secretary to dare suggest that workers might sit on the company remuneration committees that set bosses’ pay (a suggestion that was cast overboard months ago); but he remains the first to push for shareholders to block these handouts. Mr Cable deserves if not three, at least one-and-a-half cheers. Labour yesterday made sharp criticisms of Mr Cable’s plans; but it should remember that for 13 years it did little to battle corporate greed, and a lot to facilitate it.

Meanwhile the FT has fewer criticisms but would have like to see annual rather than three-yearly votes:

Mr Cable’s package contains some good proposals. In particular, his suggestion that companies should provide a single figure for remuneration is an excellent one. The compensation reports produced by many companies have become wordy masterpieces of obfuscation. A simple figure would focus minds far more effectively.

But the business secretary has missed a trick in not going for annual pay votes, plumping instead for three-yearly polls on pay policy (although these could be more frequent if policy changes). His worthy hope is that this might encourage more medium-term thinking about pay. But an obvious worry is that such votes may degenerate into another exercise in box-ticking, with shareholders voting on boilerplate policies rather than specific deals.

The Independent, though, thinks the reforms are an unmitigated success:

New rules requiring that shareholders authorise executives’ pay deals are to be unambiguously welcomed. As is the decision from the Business Secretary, Vince Cable, to insist that firms provide a single, clear figure for the total remuneration that directors receive for the year. So-called “golden handshake” payouts, when an executive exits a firm, must now also be spelled out in advance.

Critics have accused Mr Cable of diluting his proposals by limiting the requirement to a vote every three years rather than annually. But he was right to make the change. Annual votes might have destabilised management teams and encouraged short-term thinking.

With such changes in place, shareholders will finally have the tools to curb excessive executive pay. They must use them.

* Nick Thornsby is a day editor at Lib Dem Voice.

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3 Comments

  • Richard Dean 21st Jun '12 - 6:32pm

    Shareholders are the owners of a company, so in principle they have always had the power to control their executives’ pay. Am I wrong? Perhaps these measures will make it easier for them to exercise control, which is a good thing. The measures also put the responsibility clearly on the shareholders rather than a faceless remuneration committee, but this doesn’t necessarily mean the shareholders will curb pay in the way that other people want. After all, they’d might have done that already if they really thought it would massively improve shareholder value.

  • Andrew Suffield 21st Jun '12 - 8:59pm

    Shareholders are the owners of a company, so in principle they have always had the power to control their executives’ pay. Am I wrong?

    Each company has its own rules, to some extent. Shareholders do not own the company in the sense of possessing it outright; rather, they own a share which offers certain entitlements that are specified in the company’s entitlements, primarily a share of the company’s dividends or sale. While the total value of these shares is usually equal to the total value of the company, that does not equate with total control over the company’s actions.

    (There are various sets of rules, notably from the government and stock exchanges, which mandate minimum powers for shareholders. But these minimums fall far short of the kind of democratic control you imagine)

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