Can we please bust the myth of shareholders as company “owners”?
January 21, 2012
Over in the UK, David Cameron is trying a bit of populism by calling for outrageous and excessive CEO salaries to be tightened. He proposes to do so by allowing shareholders to “binding” vote on CEO bonuses:
David Cameron confirmed the move and said he was determined to end the “merry-go-round” of super-rich bosses rubber-stamping each others’ inflated deals and being rewarded for failure: “Let’s empower the shareholders by having a straight, shareholder vote on top pay packages,” he said. “The market for top people isn’t working; it needs to be sorted out.”
In Australia, we have a “two strikes” system, where if a company’s AGM rejects a CEO’s salary two years in a row, there is an automatic spill of the board.
With CEO and senior executive salaries at many companies, especially investment banks like Macquarie in Australia or Goldman Sachs in the US, at grotesquely high levels, it is clear that something needs to be done. Even more galling, there is no relationship between a CEO’s pay packet and the performance of a company. It is clear that many corporate CEOs are enriching themselves by gouging out money from the company, often with the complicity of the board who approves extraordinary remuneration contracts.
Of course, Australia’s two-strike system and Cameron’s “binding” shareholder vote proposal ignore the reality of modern shareholding: most shareholders are short-term owners of stock, and most of them are institutional shareholders, foreign investors and speculators.
The majority of shareholders (over 85%) are corporate shareholders: banks, hedge funds, pension funds, insurance companies and financial institutions. Only around 10% of shareholders are individuals. This means that they have little personal interest in the internal activities of the company.
Furthermore, this attitude is exacerbated by the dramatic decrease in the average holding time of a shareholder. The average shareholding periods have decreased from five years to as little as seven months (three months for banks).
Think about the ramifications of this. Most shareholders of a company (over 85%) have no personal stake in the company, and hold the stock for only around seven months. It is unlikely that such shareholders have much interest or long-term commitment to governance or internal corporate issues of the company.
This is precisely why CEOs and senior executives have gotten away with it for so long.
Shareholders no longer act as owners of companies. The CEOs and executives have mostly carte blanche to do as they wish, gouge as much money as they can convince the board to give them, and then more to another company. (Average CEO tenure is also at record lows.)
A case in point is the despicable behaviour of Alan Joyce and the Qantas board in trashing this once proud Australian company. They have lost millions of dollars in value through the deliberate destruction of Qantas’ good will, running down assets. There is no real incentive for Joyce or the Qantas board to build a decent, sustainable company over the long-term, that serves the interests of the community, employees and consumers (and, I suppose, shareholders). Instead, they will continue to run down the company, lose market share and gouge massive pay packets, destroying the livelihoods of thousands of their employees and contractors.
Laws putting any kind of responsibility on shareholders to reign in excessive CEO salaries will simply result in more of the same.
The people with the greatest long-term interest in the well-being of a company are not the CEO and executive team, or the shareholders, but in fact, the workers.
The employees of a company most rely on its success and continued financial health and well-being. Their livelihoods depend on the company, more-so than any CEO, shareholder or board-member.
A company’s employees deserve at least a say on executive remuneration, and in my view, equal representation on remuneration boards that determine CEO or executive salaries.
As UK politics is drifting to the right, democratisation of corporations is unlikely. Shareholder empowerment is unlikely to solve the problem of excessive executive pay.
I’m in complete agreement.