The real unacceptable faces of capitalism
Sir Philip Green. Don't you just hate him? Isn't he the completely unacceptable face of modern British capitalism? A man who takes and takes, with nary a thought for the idea that more for him might mean less for everyone else.
You might think that. I think that. I'd wager we all think that. But as we think it, I wonder if we shouldn't look around us a little more. Are you paying your employees low wages because you know that the UK's generous tax credit system will pick up the living standards slack? Are you working part-time and letting those same tax credits pay your bills? Have you founded a small charity funded by grants and Gift Aid and figure that no one will mind you using its minibus to take the kids camping at the weekend?
Did you just get the electrics done in your attic and pay for it in cash (as VAT is for people less savvy than you)? Do you have a personal services company and run your housekeeper's pay through it as "research assistant"?
All these things also mean more for you, less for other people (mostly taxpayers in these cases). Sir Philip's private equity-style management of BHS continues to make headlines as he suns himself on his superyacht. But he can't really be blamed for the pension deficit itself (for that, look to the Bank of England and years of ultra-low interest rates). The truth is that with the UK's complicated regulations and subsidy-riven welfare state masquerading as a capitalist economy, everyone's on the take one way or another. We all have an unacceptable face.
With that depressing thought in mind, let's turn away from Sir Philip to the masters of the take-take craft in the UK – the well-paid top executives of our big companies.
Executive pay has been a hot topic for some time now, and rightly so. According to the pressure group the High Pay Centre, the average FTSE 100 chief executive now earns about 180 times the average wage. By the time the average worker has come to terms with the first week of work in January, the average chief executive has already taken home the equivalent of that worker's entire annual salary. Plus a bit.
I've written before about why this matters – to investors and to everyone else. In a nutshell, the current system encourages the wrong things (high share prices over long-term success being the obvious). It is very likely to be one of the problems behind our non-existent productivity growth (chief executives limit investment to keep profits high, and borrow to buy back shares rather than create new value). And because it very publicly pays some people tens of millions for running companies they have no entrepreneurial stake in, it is horrible for social cohesion.
Some progress has been made on trying to rein in silly excesses: in 2013, rules came into force that forced companies to publish one number showing how much chief executives are paid (no more divvying the number up and hiding it in the accounts) and to give shareholders a binding vote on future pay every three years. This clearly hasn't done quite enough (I refer you back to the 180 times) so the Investment Association – which represents the UK's big fund managers – has had a go at thinking about how to make things better.
Last year it created a working group to come up with ways to "radically simplify" executive pay, which it (and everyone else) figured had just got too complicated. It has just reported back. It is disappointing stuff.
Many of its suggestions are vague enough to be interpreted as meaninglessness. Boards should be "appropriately engaged". Remuneration committees need to "exercise independent judgment". Big shareholders should be "clear" on their level of support. Boards should "explain" why chief executives are justified in receiving the maximum payouts. Companies should be "flexible" in creating packages. You get the picture. The only recommendation that is reasonably clear is that insane complications of share options and grants should be replaced with annual free grants of shares to executives.
I think the Investment Association has missed a few tricks here.
The first is that it doesn't matter how engaged and clear everyone in the process is: if chief executives can still regularly make enough in a couple of years to transform their families' finances fundamentally for generations to come, you will always have a reputational problem and you will always have an incentive problem. The Investment Association says this is important – but a matter for boards. I reckon that it's a matter for large shareholders – the ones that are supposed to control the boards and the ones the Investment Association represents.
The second is all about individual shareholder enfranchisement. Most individuals hold most of their equities via online brokers, or via the big fund managers that the Investment Association represents. If it is the former, they rarely vote (too complicated). If it is the latter, they rely on the fund managers to vote for them. That's not a good way to translate the feelings of the final beneficiaries of the shareholdings (not fund managers, but you and me) to company managements.
The third is that it has not suggested annual binding votes on pay (the working group has apparently not had time to "consider all the options"). I don't get this. It seems to me that all shareholder votes – on everything – should be binding. Because if they aren't, then what's the point?
If we really want to see corporate governance reformed – and pay in particular – we need real shareholders (not just middlemen) to be voting and we need those votes to count. Get that sorted and I think we might soon end up with a genuine "radical simplification" of executive pay – in the form of high (but not nuts) flat salaries, some of which we might encourage leaders to buy shares with. I want that; you want that; surely everyone wants that?
Finally, I'd like to mention a man who had very little truck with this kind of thing. My friend Peter Bennett, a veteran investment manager at Walker Crips, who died recently. In January, he told me that there aren't many financial "gimmes" in an investing life, but that gold mining stocks was one of them. Buy all you can, he said. It was one hell of a parting gift from one of the best of the old school analysts.
This article was first published in the Financial Times