News Column

IoD says putting good governance first means tough stance on excessive pay

August 19, 2014

Nils Pratley, theguardian.com



What's got into the whisky at the Institute of Directors? The bosses' organisation never used to be in the vanguard of voices condemning egregious pay abuses and boardroom power-grabs. Suddenly it is.

It was among the first to point out that Barclays' bonus pool last year was three times as large as the total sum of dividends paid to shareholders. "For whom is this institution being run?" it asked. At Sports Direct, the IoD said the board's attempt to push through a big pay award for Mike Ashley suggested there was "no effective check" on the founder's power.

Other big public companies to feel the lash of its tongue include Experian, Burberry, Bumi, Essar Energy and Eurasian Natural Resources. The brief was even extended to Fifa. World football's governing body was described on the eve of the World Cup as "unaccountable and dysfunctional", though it's doubtful Fifa president Sepp Blatter cares one jot about what they say about him in Pall Mall.

Simon Walker, director general since October 2011, argues the IoD is following principles established a century ago by royal charter. These include the promotion of good governance, boardroom integrity and professionalisation of the job of being a company director.

"We are trying to get back to the focus on governance, on running companies better and in the interests of stakeholders broadly, in the climate we are in today.

"Competition and the market have, in my view, brought greater benefits to humanity than any other movement ever and we need to remind people about that. But we also need to make sure that it is competitive and is run in the interests of all its participants. That is what governance is all about. It is about running a business properly and in accordance with its professed purpose for all its stakeholders."

What is different from the past, however, is the IoD is prepared to single out major companies for criticism. The CBI, the other major business organisation with a royal charter, rarely does that.

"We have been quite specific and I see no need to resile from that," says Walker. "We have a huge advantage in that we are an organisation of 38,000 individual members, each of whom carries the same weight and pays the same subscription. I fully understand that other organisations that have corporate membership don't have the same luxury in the same sense."

No IoD member has resigned because of a stance taken on pay or governance, says Walker: "We have had a lot of positive comment on criticism of excessive pay in big companies in general, and banks in particular, and the membership has been as critical as any newspaper."

He says he received most protest from the ranks when he argued on the BBC against the stripping of Fred Goodwin's knighthood. A prison sentence is normally required to remove a person's gong and, since Goodwin was never convicted of any offence (or even charged), Walker, a former communications secretary at Buckingham Palace, was offended by "the wholly inappropriate denial of process". He felt obliged to write to IoD members to explain that he really wasn't defending RBS or banks.

Companies "engage with us, reply, they make their case" when criticised by the IoD, says Walker. He makes it sound polite. In private, some are furious about their rebukes.

The High Pay Centre calculated this week that the bosses of Britain's top companies were paid on average 143 times as much as their workers. But Walker's argument is not against high pay in general, but against excessive pay, particularly when skewed incentives distort executives' behaviour.

"I have no problem with high pay in principle. I do think pay for top executive jobs has lost any sense of proportion. I am not one to focus like the High Pay Centre on ratios, because "fairness" and "fair" are not words that I bandy about. But excess, it seems to me, is clear and has been for decades; a decade certainly."

He blames, in part, the focus on "shareholder value", famously described in retirement by Jack Welch, once regarded as an arch exponent at General Electric, as "the dumbest idea in the world". Walker says: "A lot of it goes back to the concept of encouraging top executives to run companies on the basis of earnings expectations, rather than running real businesses. And that is wrong and has had very damaging effects."

He cites another famous admission, from Peter Voser, who said after his departure as chief executive of Shell that if he had been paid half as much he wouldn't have run the company any worse and if he had been paid twice as much he wouldn't have run it any better.

The moral of that tale, says Walker, is: "If you hire top, able, talented people, which you should do, and hold them to account, they will do a fundamentally decent job." The problem lies in skewed incentives that encourage "exotic" behaviour. "A company is not just about short-term profit and shareholder gain."

What would Walker whose salary is 300,000 a year regard as reasonable pay for a chief executive of a mid-ranking FTSE 100 company successfully discharging its responsibilities to shareholders and society?

"I would be reluctant to magic up a figure. It would clearly be a very large sum of money. But it is the variability and the capriciousness that strikes me as wrong."

He says he understands "the dilemmas" facing remuneration committees because: "A chief executive who rebuilds a company near collapse can make an extraordinary difference."

Walker was communications director of Reuters from 2002 and 2007 and thinks his old boss there, Tom Glocer, helped to save the media giant from collapse during its crisis years. The point, though, is that: "Not all business leadership is fundamentally a rescue mission."

Do not think, however, that the IoD wants the government to intervene on boardroom pay. On that issue, it is as attuned to market principles as one would expect. "It is fundamentally for shareholders to be asking these questions."

The most high-profile rebellion during this year's season of annual meetings was at Burberry, where 52% voted against a pay report that showed new chief executive Christopher Bailey, the company's design guru, had been given 20m-worth of shares not tied to performance. The IoD's view is that the company should respond.

"Burberry has clearly been run extraordinarily well for many years," says Walker. "Now does that justify the extraordinary pay package that is conjured up for a man who is clearly an outstanding talent but is yet unproven [as chief executive]? Well, clearly most shareholders think it doesn't."

He applies the same shareholders-first thinking to foreign takeovers. The IoD was fiercely against any government intervention to block Pfizer's ultimately failed attempt to buy AstraZeneca. "We weren't on Pfizer's side," says Walker. "We were just against government having a role."

But haven't fund managers, with a few exceptions, shown themselves to be pusillanimous on excess pay? "It may be that shareholders are pusillanimous because they haven't had any power," replies Walker. "In that sense I think what government has done in giving them a binding vote is appropriate."

He wonders whether fund managers could be pushed harder to apply stewardship principles. Trinity Mirror, he argues, was led by "a charismatic and media-smiled-upon CEO [Sly Bailey]" but "ran itself into the ground without shareholders asking fundamental questions."

He adds: "I am not a lawyer, but if there were civil remedies available against pension funds because they have been listless and apathetic in the way they engaged with companies in which they had large positions that could be quite a constructive way to nudge shareholder activism. At the end of the day, this is your pension and my pension. It is not money held by rich titans on their own behalf."

The deeper issue, he argues, is about accountability in the boardroom. "I do deplore the extent to which public discourse about corporate governance has become about pay. Of course it matters. Of course remuneration incentives are important, but there are many more important issues. Questions about 'where was the board?' on critical decision-making around, say, RBS's strategy as Fred Goodwin led it over the cliff, or Barclays' as it nearly outbid RBS for ABN Amro in 2007. The question is: where the hell's the board in all this?

"What we know about those boards, for example, is that they included some of the most distinguished business people Britain has ever produced. What's wrong? It's the need for boards to be doing their job in a vastly more activist, questioning way in terms of holding overweening CEOs and management generally to account at the right time."


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Source: Guardian Web


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