Andreas Whittam Smith: Were big shareholders asleep at the switch?

So many chief executives have been sacked in recent weeks for failing to deliver the performance promised by their high salaries that you might think the brief reference in yesterday's Queen's Speech to directors' pay was unnecessary. The top person at the big insurers Aviva was forced to step down on Tuesday after a shareholders' revolt. The boss of the printers and newspaper owners Trinity Mirror suddenly resigned last week, and the same thing happened at the drugs giant AstraZeneca last month.

The Government is now to bring forward legislation to "strengthen the framework for setting directors' pay by introducing binding votes". As recent events show, shareholders' existing powers can be effective if vigorously deployed. How can that be?

The reason is not so much that shareholders have substantial reserve powers to remove a board of directors, but that they are the suppliers of fresh capital. It is hard to believe that a com- pany that was permanently at odds with its shareholder base could prosper.

But there is a greater mystery. Why did the big shareholders in British businesses, who comprise pension funds, life assurance companies, fund managers and endowments, let so many years pass by – until last month – without once trying to halt the remorseless rise in the remuneration of the directors of the large companies?

The process has been under way since the 1980s. Were big shareholders really asleep at the switch for 30 years, as they appear to have been, or was something else going on?

A number of influences were at work. Directors' pay is a tiny part of total costs. Moreover, rather than make an issue of directors' pay, turn up at the annual general meeting, make a speech and cast your vote, there is a simpler route: sell your shares if you don't like what is going on. And there has been a further complicating factor.

Yet, something did change recently in the minds of big shareholders. They began to sense that they were losing control of the companies of which they were the legal owners.

Shareholders certainly won't feel like this any longer if the measure announced in the Queen's Speech becomes law. It is not just that an advisory vote now becomes binding and "whoops" says the board at the annual general meeting when shareholders don't approve, "we will have to fall into line and change our plans". Life doesn't work like that. Rather, companies will strive to make pay awards to directors that will not excite controversy and so be approved.

They are bound to wish to avoid an adverse vote that would only serve to advertise their impotence.