Revolution in the City?

This headline (CityAM) caught our attention this morning. Given the tense political situation in the World we expected pictures of bloodshed and mangled bodies. But no, the revolution referred to the 'protest' votes against top executive pay that were cast by the (institutional) shareholders of several large UK companies. But so far, this protest is not much more effective than the protest staged by Occupy Wall Street. First of all, the votes are not binding. In addition, the opposition against admittedly excessive top executive pay lacks a reliable compass. Even if one optimistically assumes that pay awards will scaled back (unlikely) or at least not increased much more in the future (are pigs flying?) the fact is that the whole discussion about top pay needs to focus on the key question: what is fair and justified 'compensation' for top executives? Claiming that top pay is set by 'market' forces is no answer as there simply is no proper 'market' price for top executives' pay. If there would be, remuneration would not be pegged so as to be in the 'top' quartile of the peer group. Company boards would be hard at work to develop a strong group of executives below the CEO level hat could take over if the CEO finds his pay as being too low. In addition, remuneration consultants would point out those CEO's that get by with less compensation and suggest that the CEO matches their pay - or else. Ultimately the question boils down to how the boards and remuneration committees are appointed. As long as the CEO has a decisive hand in appointing his own supervisors the problem will never be addressed properly. Similarly, the major investing institutions - especially the top 40 who control nearly two thirds of all assets - have to take up their responsibilities as fiduciaries for the ultimate shareholders. Either there has to be a way to give the end investors a say in the voting policies of their fiduciaries or the door will open for politicians to interfere more and more in this aspect of corporate governance.
(04/05/2012)