So the word of the weekend appears to have been “shareholder”. David Cameron and Danny Alexander have been out in force, explaining to us how shareholders should be given a say on executive pay. Here are just three reasons why this is a red herring if I’ve ever seen one.
The uninvolved shareholder
I happen to be a shareholder. I own shares in two distinct ways. Firstly, I’m a shareholder in companies I have a significant involvement with – my full-time employer and a small start-up I helped out over the summer. The start-up hasn’t had an AGM yet, so I can’t tell you how I would vote at that, but when it comes to my full-time employer, I get a letter from the share management company with some vague explanations of what we are voting on (and links to more details), a recommendation on which way to vote, and some boxes to tick. Most years I tick the boxes, some years I even remember to send the form back. This is, frankly, what an involved shareholder looks like.
The other way in which I own shares is rather more removed. I have a stocks and shares ISA which puts my money into an investment fund which is managed by my bank and currently seems to be eating my money. I also have a company pension which too puts my money into one kind of investment fund or another, managed by one bank or another. I don’t even know which companies I own shares in through these vehicles. To be more precise, I don’t own shares this way – I own chunks of an investment fund, which in turn owns shares.
So when the Prime Minister says that “shareholders” should have a say in executive pay, what he actually means is pension funds, investment banks and insurance companies. Those are the largest blocks of shareholders around, and the only ones with enough clout to make a difference. Their interests are not always for the company in question to be productive, stable and long-term sustainable, as long as they can make a quick buck.
The sprawling multinational
The reach of any legislation on shareholder involvement in executive pay is likely to be limited. It will hit small and medium-sized domestic businesses, as well as the “C” level of larger companies incorporated in the UK. Yet if you just happen to be a “Director” or “Vice President” running the UK operations of a sprawling multinational incorporated in the Cayman Islands, well then you’re not an executive, are you? Nevermind that the level of responsibility and the salary to go with it are probably quite similar to those of a “C” level exec of a UK company.
At this point, it’s worth asking ourselves whose pay we’re limiting and why. This is where the answer you are likely to get from the coalition is something along the lines of “not paying for failure”, whereas someone like Deborah Hargreaves from the High Pay Commission will tell you that it’s all about addressing inequality and social injustice. It does somewhat depend on your motivation as to whether the shareholder argument makes sense.
The old-fashioned Marxist analysis
Finally, let me indulge in a piece of good, old-fashioned Marxist analysis. If we look at this through the lens of the capital/labour dichotomy, we quickly see that any move to give shareholders more say in executive compensation retains the power on the side of capital. Employees continue to be disenfranchised in this process. There are of course exceptions in the form of employees who may own a small number of shares in the company – but for those cases I shall simply refer you to the problem of the uninvolved shareholder above.
So if a fig leaf is what we want, then giving shareholders a say in executive pay is the way forward. If we actually want to address both the widening social inequality we are experiencing and the market failure caused by interests of major shareholders being less than compatible with the long-term interests of the company, then we need to look for other solutions.