When a binding vote shouldn’t be a bind for boards

New British PM Theresa May has hardly got her feet under the desk at 10 Downing Street and already she’s sending out signals that she’s committed to a corporate governance overhaul – making shareholder votes on pay binding and getting employees onto company boards her two main thrusts.

And while it sounds more like the words we’d expect from Labour leader (well, at least he is at the time of writing) Jeremy Corbyn, these sentiments are to be welcomed.

Let’s take a closer look at the first issue, that of giving shareholders a binding vote on executive remuneration, this week, before turning to the employee representative matter next time.

In Australia, as in the UK and most other jurisdictions, boards must table a remuneration report at the AGM in front of shareholders. They need to spell out what the top executives will be paid, as well as reveal who’s getting bonuses and options.

Of course, the shareholders can object and vote these packages down, but right now their voice counts for little as the shareholder vote is a non-binding vote. This will all change in the UK if Ms May has her way. The previously powerless shareholders will suddenly have teeth and they could well take the decision away from the board.

So why is Ms May flying in the face of standard Conservative doctrine of preferring the market or sector to sort itself out rather than mandate what should happen?

It’s not so much that executive packages are getting out of hand – and they are, as boards tend to take advice from remuneration consultants and this tends to ratchet up salaries – but that research both here and abroad suggests that there’s an inverse correlation between the more executives get paid and the performance of their companies.

An Australian study tells us that executive remuneration levels grew from 22 times average weekly earnings to 74 times average weekly earnings in the decade 1992-2002, and that when the performance-optimal range of 17 to 24 times the weekly wage is breached, the performance of a company begins to deteriorate.

This is backed up by a recent US study published in the Forbes Magazine that intimates that the five per cent of CEOs who were the highest paid in the country headed companies that performed on average 15 per cent worse than their peers.

Perhaps Ms May is correct because of these studies. And until the boards themselves seriously embrace the research and, rather than just go with existing benchmarks or what consultants say, take a close look at package versus performance, perhaps the only solution is to give shareholders a binding vote?

Until next time,

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