City pay revolt: Long live this most capitalist of revolutions
OFF with their heads: the message from shareholders is becoming louder and angrier by the day. “Listen to us”, they are rightly telling company boards, “you work for us. We pay you. Stop behaving as if you own the place.” And that’s exactly the point: CEOs are merely shareholders’ paid hands. The real capitalists are the buy-side financial institutions – long only funds, hedge funds, pension funds, insurance companies and other pooled investment vehicles. They are the shareholders – and therefore the owners of corporate Britain. The fact that they have belatedly remembered their responsibilities is the best news in the City for ages.
In recent days, institutional investors have begun reasserting themselves – they too had come under fire, rightly in some cases, for failing to act as proper stewards of individuals’ savings and pocketing too many fees for insufficient returns. Absentee landlords are never a good thing. Capitalism requires engaged proprietors and custodians who monitor and assess the performance and behaviour of their executives to ensure that capital is allocated to its most productive use. Paradoxically, two of the major firms to have succumbed to a shareholder rebellion on pay – insurance giant Aviva yesterday and hedgie firm Man Group a few days ago – are themselves large institutional investors. But corporate capitalism has an astonishing ability to reinvent itself. The fact that it’s all kicking off in the City is a great sign that the system is beginning to work sensibly again.
Checks and balances are built into a properly functioning market economy: if institutional shareholders accept poor returns, their own investors moan and threaten to withdraw their funds. When the equity markets are weak, as they are at the moment, the pressure eventually reaches breaking point. That is where we are at today, and it helps to explain the mounting anger. Booming markets are bad for corporate governance: only the worst excesses get stopped and everybody turns a blind eye to rent-seeking and bad behaviour.
It is vital to understand what the growing revolt against inappropriate boardroom pay deals is about – and what it isn’t. This is not a socialist revolt against inequality. It is a capitalist revolt to boost returns to capital and prevent boards from diverting resources to themselves. This is not about the public defeating the City – it is about one part of the City holding another part to account. The rows are not even really a protest against high pay in general: remember, fund managers are not exactly badly paid themselves. They are merely opposed to the wrong sort of high pay, the kind which isn’t related to performance and which implies a dangerous looseness with other people’s money. Golden hellos to compensate execs for leaving their previous job now clearly fall into that category. High pay for great results remains fine; but pay hikes while share prices plummet and returns on capital wither are rightly no longer being tolerated.
The City is also finally cracking down on rewards for failure, long a blight on the financial landscape. Sly Bailey, who yesterday quit as boss of Trinity Mirror, the newspaper group, presided over years of decline. The mood has also turned against bosses who demand special dispensation because their firms’ share price has been hit by circumstances beyond their control, such as the Eurozone crisis or new regulations forcing banks and insurance companies to hold more capital. The message from shareholders is loud and clear: “if we suffer, or if we gain, then so should our CEOs.” Long live the revolution.