Say you own a business with a sole employee. Me.
And tomorrow morning the lead article in one paper or another makes a sharp point that I’m outrageously overpaid. Whose responsibility is it that the situation is dealt with? Yours. You own the business, you fix the remuneration, you decide if it’s too much, too little, or just right. And if public perception is that it’s too much, then you, as the owner, sort it.
Every public company has shareholders. They own the business. And while they may be more disparate than one individual, they have the same responsibility to control its leadership. They can agitate for change, they can debate strategy, they can vote for and against the management and they can control remuneration.
This is hardly groundbreaking.
Shareholders have all the tools at their disposal to address any remuneration issues they have. Yet current sentiment would suggest that they have not done a great job so far.
Businesses, in general, would prefer no publicity or good publicity to bad publicity. Remuneration has definitely provided acres of bad publicity. So there is clearly a breakdown of some description or other. Put very simply, the issue is communication.
Corporate governance operates according to the “comply or explain” rule. If you don’t comply, you explain. But explanations require dialogue and engagement. And this is where you hit the first issue. Most shareholders now split a business into two parts when it comes to engagement.
The fund managers decide what to invest in, and if they are happy with the leadership. The governance team decide if they are happy with the governance of the business. Which is where the remuneration issue sits.
Fund managers, not unreasonably, want to make money. So firms keep their best people in head office, as active investors, while governance teams sit elsewhere, in lower cost environments.
The managers are paid to increase their funds. So shareholders engage with management regularly. But the governance teams add no profit increasing value – so they don’t have that privilege. Indeed, firms regularly ask to see both the active manager and the governance team together, but very rarely do. Instead they discuss remuneration with a fund manager, who is voted on by people they can’t engage with. It is not conducive to helpful dialogue.
And then you get to the proxy holders. These organisations have reacted to the splitting of active management and governance by providing an outsourced governance service. And they are huge. They will often represent between 20-30 per cent of all shareholders. And in a governance system that frowns on votes below 80 per cent, that makes them hugely influential. I am consistently told that they are almost impossible to communicate with. And it’s understandable.
They have to look at hundreds of companies, and they don’t have the capacity to do so. So they make regular mistakes, send queries in at 6pm on a Friday insisting on answers before 8am on a Monday, won’t engage, and generally don’t help create a sensible dialogue.
If you can’t explain, you have to comply. Which means everyone sticks with the tried and tested methods. But we are continually told these don’t work. So you need to engage to develop a more appropriate system. If it was your business, you’d need to lead the engagement. The same has to apply to shareholders.