Mark Goyder, chief executive of Tomorrow’s Company, says Yes.
Remuneration structures are one cause of short-termism. Others include short chief executive tenure, threats from opportunistic shareholders, noise created by sell-side research, and the marketing need for fund management companies to demonstrate performance.
Listed companies can move away from the madness with three steps. First, in its mandate the board defines strategy and time horizon. It communicates this clearly, attracting fund managers who support this approach and, like Unilever, driving away investors who want to be less patient. Second, the board defines the kind of culture and behaviours it will promote. Third, the remuneration committee is charged with ensuring that rewards and recognition across the company are in line with these.
With these steps in place, the annual binding vote on pay becomes a strategic exercise – an evaluation of the company’s approach to rewards for value creation. It will only be a problem for firms which have not taken these coherent steps.
Tony Manwaring, executive vice-president of external affairs at the Chartered Institute of Management Accountants, says No.
Those who think they can force a long-term focus by introducing binding shareholder votes have the right aim, but the wrong tactics.
Many firms do need to increase focus on the long term. Rewards are often not tied to the right mix of incentives, nor linked to what really drives value in the business. This can encourage firms to prioritise short-term returns over long-term resilience. It’s widely accepted that the actions taken by bankers to achieve short-term targets played a major role in causing the worst financial crash in recent history.
Even so, binding shareholder votes are a blunt solution that will create unintended consequences. Shareholder activists can exert a disproportionate effect on outcomes – and they may or may not have a firm’s long-term resilience at heart. A better solution is improved remuneration policies, tying pay and bonuses into a mixture of financial performance and evidence that the organisation is planning and building for the long term.