Shareholders are the only ones who can heal capitalism now

They must find a collective voice to rein in galloping executive pay, which is skewing the entire system
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The Independent Online

"Something has gone wrong with capitalism." That remark was made to me not by a Marxist agitator but by a former Tory minister – one who also happens to have a long and successful track record in business. It's not something he would have said a generation ago, when he was in the vanguard of the Thatcherite revolution. But when he says it now, wise heads of all political persuasions nod in troubled agreement. The calibration of the great machine that drives free-world economies has gone out of sync, and it's not easy to see how it can be fixed.

What my friend meant was that the rewards of capitalism have gone haywire: they are no longer distributed in ways which are economically optimal or, to most people's thinking, socially fair. First, there has been a swing in the balance between investors who provide capital and the managers of businesses which use that capital. Last week's stockmarket falls, taking the FTSE100 back to levels reached 15 years ago, are a reminder of how feeble returns have been in most sectors this millennium. Yet during that same period, median earnings of FTSE100 senior executives have soared by 278 per cent, according to a survey by Income Data Services (IDS).

Institutional shareholders have been inarticulate in resisting this trend: they rarely bother to vote against executive pay awards; they express dissatisfaction over low returns either by demanding changes in management or by churning portfolios in search of better yields elsewhere. Few think of themselves, in the Warren Buffett mode, as committed, long-term partners in the businesses.

This changed relationship favours short-termism over planning and investment, including the research and development that's essential to remaining globally competitive. Meanwhile, revolving-door hiring and firing fuels the executive-pay spiral, encouraging higher demands in compensation for lack of security. But if shareholders ought to be capable of looking after themselves, there is another shift in the balance of rewards that is even more perturbing.

Directors of FTSE100 companies earn 120 times the average pay of their employees, according to IDS, compared with 47 times in 2000. That reflects a pendulum swing since the late 1970s, when the multiple was about 20 and British executives were generally demoralised as a result.

But it's striking that in a period when average UK earnings have been rising at less than 1 per cent per annum – and real wages, adjusted for inflation, stand below where they were in 2008 – executive pay has risen by more than 20 per cent in the past year. The justification is that corporate chiefs operate in a global talent market (telecoms and media businesses top the pay league) and that ambitious companies have to offer top dollar to attract the best.

Maybe so, but that should not prevent executives, and boards who employ them, exercising the "restraint and awareness" that the Bishop of London, Dr Richard Chartres, told me last year he felt was missing from 21st-century capitalism. It should not inculcate in the executive class a sense of themselves as a golden elite, and of their workers as expendable: again, this divergence of rewards is destroying the sense of enterprise as partnership.

Non-executive directors of public companies tell me that the senior executives they sit alongside are more intensely motivated than ever by personal rewards – the value of their share options, for example, and how it might be affected by strategic boardroom decisions. But non-execs also feel powerless to change this culture, not least because they lack shareholder support. So the skewed allocation of rewards continues. But businesses do not perform better as a result – and popular resentment rises.

But hang on, I hear you say, you're that ex-banker chap from The Spectator. Surely you're a supporter of free-market capitalism? Well, yes I am, and so is my friend the ex-minister. Neither of us wants governments to interfere in business more than they do already: Vince Cable's grumblings on this subject have achieved nothing, and the EU's most draconian intervention, the bankers' bonus cap, was instantly and cynically circumvented by every bank in the City. The answer can only lie with shareholders, who need to find a new collective voice and concern for the healthy future of capitalism – and with it the long-term return on their own portfolios. But I worry whether they're capable of doing that, and how much damage and unease will result if they can't.

'Any Other Business', a collection of Martin Vander Weyer's writings from 'The Spectator' and elsewhere, has just been published by Elliott & Thompson

Hamish McRae is away

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