The blow against fat-cattery at GlaxoSmithKline is great news for the business community as well as for society as a whole.
Shareholder protest at executive pay packages has been growing, but up to now there seems to have been only modest effect. But the £22m package that GSK had negotiated with its chief executive, Jean-Pierre Garnier, in the event of his leaving the company was so grossly tilted towards rewarding possible failure, that it really had to be killed. (One feature was that both he and his wife should be considered to be three years older than they actually were for pension purposes - a rare example of people wanting to be considered older than their years.)
And so the deal was thrown out by 51 per cent of its shareholders. That might seem a narrow enough margin, and the vote is only advisory. But the implications are huge because the company lobbied hard to persuade shareholders that the deal was justified. The vote will therefore change the way all boards think about executive pay in the future.
This is self-evidently good news for our society. The way the capitalist system distributes its rewards and punishments has always been pretty arbitrary, but the scale of the abuses in quoted companies had reached a point where it undermined the whole system. The vast majority of the things we buy in our daily lives - from a car to a coffee - are provided by quoted companies, while most of our pensions are invested in them. Our whole standard of living turns on these companies being respected and well run.
One of the really alarming aspects of global capitalism during the 1990s was the increasing disconnect between the managerial cadres who ran companies and the shareholders who owned them. Managers and the boards that appointed them stopped seeing themselves as custodians of other people's money and became a self-serving interest group, dedicated to grabbing more of the cake.
Less self-evident are the benefits that will come to the companies themselves. I can see at least five.
First and most obviously, they will cut their costs. Top pay is not only a big cost in itself, particularly when share options are taken into consideration. It also sets the scale for executives lower down. So it is extremely useful for a board trying to hire a new chief executive to be able to say, "Look, we'd love to have you, but the shareholders won't accept it." Not only does it increase its negotiating leverage; it also checks salary creep.
This will matter more and more. In a world of inflation, you could to some extent get away with overpaying, for inflation would cut the real pay if you made a mistake. In a world of price-stability, it is even more important to count every penny.
Second, sky-high pay for senior executives rewards political skills rather than practical ones. Anyone who has observed large companies knows that there are people who get things done and people who act as courtiers to people higher up the ladder. The greater the differentials, the greater the pressure for people to develop skills of flattery and indeed deceit. Getting the promotion matters more than getting the work done.
The more that companies are forced to scrutinise top pay, the more they will be forced to pin down the real contribution made by their staff: to work out if they are really worth it. If this ends the cult of the superstar chief executive who turns out to be better at self-publicity than running the company, then that is all to the good.
Third, excessive pay and plush conditions at the top disconnect companies from their customers. People taking decisions fail to understand the values of their customers and mismanage as a result. Companies where top executives are made to keep their feet on the ground - such as WalMart, the world's largest retailer - have been particularly adept at responding to changes in customer taste. By contrast, Marks & Spencer, which had a management that feather-bedded itself, assumed it could always jack up the prices in the shops. Disaster followed. It needed a complete overhaul of top management before M&S could be restored to health.
Fourth, companies will be more cautious about global expansion, particularly in the US. One of the reasons why GSK misread the mood of its predominantly British shareholders was that it was proposing a-US-style contract: Mr Garnier lives in the US. Actually the mood against excessive executive pay is now running just as strongly in the States as it is here, but historically the US has had much wider pay differentials than anywhere else in the world. A number of British companies have expanded into the US, not always successfully, and found themselves importing US salary scales as a result. On a number of occasions they have also imported US chief executives, also not always successfully.
This is not to say that companies should never expand internationally or indeed merge with foreign ones; that would be absurd. It is simply that companies wanting to go abroad need to be sensitive to the clashes in culture that such expansion brings. There is a global market for top managerial talent, and the fact that the US out-pays other countries will tend to suck talent there. But it will only tend to do so. The task ought to be to create rewarding, well-paid jobs that don't depend on US-salaries to attract good people. Surely it should be possible for European companies to do that.
Finally, there will always be some executives who will threaten that if they don't get the terms they want, they will go off and start their own business. But that would great. It is exactly what the market system needs: people who start businesses.
That can be good news for a wise firm, for it will back staff who have ideas for new ventures. There are billion-pound businesses that have been created by executives who feel a bit restless and get funds from their employer to start something new. If the employer does not want to join in the project there are always others who might, plus an active venture capital industry eager to find experienced executives with good ideas.
This is what the keeps the market system sweet: the freedom to start something new. People who really want to make money don't go and work for some giant corporation. They work for themselves.
Sure, we need the corporate giants like GlaxoSmithKline. We need them to be well-managed. And the people at the top of those companies need to be decently paid. But if this new culture of greater scrutiny of those companies' top pay pushes more ambitious executives out into the world to start their own businesses then that is all to the good. Never forget that it is new firms that create jobs while old ones sack people.
So Mr Garnier, if you are so valuable, why settle for a £22m and a premature pension? Start something new, make a few hundred million and people will cheer you instead of despising you. Off you go.Reuse content