Government must stop meddling and leave pay decisions to shareholders
20 June 2012 1:05am
DEMANDS for government intervention to limit executive pay are misguided. As the WPP vote against Sir Martin Sorrell’s pay and other AGMs this spring showed, shareholders can act – corporate governance is their responsibility. The only way that governments can improve corporate governance is by removing obstacles to shareholder action.
Government regulation of corporate governance is not justified by envy or inequality, or by gaps between aggregated remuneration levels and averaged share performance. When unequal payouts reward unequal contributions, they are not an indication of unfairness or market failure. Similarly, reciprocal back-scratching, upward ratcheting of pay, and the capture by executives of remuneration consultancies, are not necessary features of market operations. They can be corrected by free market mechanisms. It is the shareholders’ responsibility to insist that rewards fairly reflect the corporate objective.
The High Pay Commission, an inquiry set up to look at executive remuneration, concluded that high pay is corrosive and unfair. But the purpose of corporations is not to promote an egalitarian society. Corporations aren’t creatures of the state, there to serve official social ends. They are the private property of their shareholders, and serve the ends designated by their owners.
Corporate governance refers to ways of ensuring that corporate actions, agents and assets are directed at the constitutional objectives of the corporation, set by the shareholders. It should be up to the shareholders to determine the rights, responsibilities and remuneration of all their corporate agents, and to specify the kinds of accountability they require. Given the varied history, size, activity, jurisdiction and shareholder composition of corporations, one size will emphatically not fit all.
Regulation is counterproductive. It is inflexible and imposes substantial costs, both in funds and freedoms: even disclosure is not costless. The High Pay Commission programme would increase intervention, impede corporate governance, and damage business. In demanding detailed disclosure, greater diversity, inexperienced directors, claw-back provisions, and binding votes, the High Pay Commission’s suggestions would further constrain shareholders from governing their corporations in their own ways.
The government needs to reduce obstacles to free markets and genuine owner control. Free markets elicit innovative solutions to problems as they arise, in all their real-life variety; they effectively test those solutions and disseminate best practice. In a genuine market for corporate control, companies would compete for shareholders, and investment managers would compete for funds, partly on the degree and kinds of accountability they offered to owners and investors. The best way to ensure good corporate governance would be to maximise shareholders’ freedom to govern their own corporations in their own ways.
Dr Elaine Sternberg is author of Mind Your Business, published today by the Adam Smith Institute.
In other news
Network Rail engineers have destroyed the Abbey Wood station as part of the Crossrail development that is expected [Read more]
The Championship looks set to once again be named the fourth most-watched league in Europe, following a seven [Read more]
The Costa Coffee owner said Brittain was "the standout candidate from a very strong field". [Read more]
Sugary foods may be taxed to cover the costs of treating obesity, a government minister has said.
European governments must increase efforts to adopt structural reform if “lasting stability and prosperity” [Read more]
Accounting, finance and economics - choose to study any of these subjects anywhere and you'll be likely to land [Read more]
Badly-behaved bosses are a nightmare if you're the unfortunate employee who has to work for them - but they're [Read more]
Last night hundreds of people in Kent were woken by a 4.2 magnitude earthquake, which occurred just before 3am. [Read more]
Are the UK's new crop of MPs actually any good at social media? [Read more]
The retail industry is in a state of flux. Consumers and technology are driving fundamental changes. And now, [Read more]
Newly re-elected Prime minister David Cameron will hold his first talks with European Union leaders today, as [Read more]
The Conservatives came to power on the back of an improving economy and with the promise of more improvement to [Read more]
Cert 12a | ★☆☆☆☆ [Read more]
Cert PG | ★★☆☆☆
Old Vic | ★★★★☆ [Read more]
Individual train operators say services are back on track as Network Rail blasts "deplorable" strike threat. [Read more]
Hewlett Packard (HP) announced disappointing earnings this afternoon, with revenues missing analysts expectations. [Read more]
In pictures: National waiters day kicks off with race around Hyde Park. [Read more]