David Prosser: Shareholders must tackle excessive boardroom pay – or face political meddling


Outlook Given his Labour links, including a stint in government under Gordon Brown, one might have expected Lord Myners to be more supportive of Ed Miliband's recent intervention in the debate on executive pay. Fortunately, at least for the quality of the discussion, Lord Myners is now free from the shackles of government and no longer feels the need to toe the party line.

The Labour leader, you will recall, said last week that companies should have to publish the ratio between the pay of their most highly rewarded directors and their average workers. It was a very political compromise, designed to give the impression that Mr Miliband shares the popular outrage about out-of-control boardroom pay while sending a message to business leaders that he has no intention of forcing them to do anything about it.

In fact, such was the political adroitness of Mr Miliband's manoeuvre, Vince Cable, the Business Secretary, took a leaf out of his book in a speech to an Association of British Insurers conference yesterday. We saw the same sort of language – "ridiculous levels of remuneration are going unchallenged" – and the same sort ofpolicy response; in Mr Cable's case a review of disclosure requirements on pay and performance.

Lord Myners, speaking at the same conference, sensibly refused to endorse the politicians' suggestions. Instead he has a familiar answer to the problem – that excessive executive pay is a matter for shareholders – and a new idea for turning that answer into a real solution – that companies should have to have shareholders sitting on the nomination committees that appoint their boards.

It's a cute trick. The problem currently is that while shareholders – the large institutional investors that dominate share registers – know they are in theory responsible for holding executives to account, in practice they rarely opt to do their duty (preferring, generally, to sell up if they become disenchanted with the company).

Were we to co-opt shareholders on to the nomination committee and give them responsibility for monitoring the performance of non-executives, they would no longer be able to opt out of their duties as owners. We might at last begin to see the appointment of board directors prepared to stand up for shareholder value on a whole range of issues, including executive pay.

Both companies and investors, both unlikely to welcome an idea that might at last make a difference on excessive remuneration, will no doubt find all sorts of problems with Lord Myners' idea. Which shareholders would bechosen and what if they sold their stakes? What about the dangers of giving some investors access to price-sensitive information? Do institutional investors have the right people to serve in such roles?

All of the potential challenges are surmountable, however. And what both companies and their largest shareholders must realise is that if they do not get to grips with issues such as executive pay, they will sooner or later find the matter taken out of their hands.

Mr Miliband's intervention last week was a cautious and relatively unthreatening opening shot in this argument. The same might be said of Mr Cable's offering yesterday. Still, both men recognise the strength of feeling about the way executive pay has risen so quickly in relation to everyone else's. As the Business Secretary pointed out, the total pay of the directors of Britain's FTSE 100 blue-chip companies last year was 120 times that of the average UK employee, up from 45 times in 1998.

Politicians are not best placed to tackle that inequality and, though they may not say so in public, they do not want to. But they will feel compelled to do something if shareholders fail to act.

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