Comment: The executive pay battle will be a futile stomp on old ground Published on: 7 December 2016 Writing for The Conversation, Dr Michael Price discusses the Prime Minister’s proposed reforms to reduce headline figures of executive pay. bluedog studio/Shutterstock , Theresa May has made tackling corporate excess one of her key priorities in government. In a reform she promised shareholders a binding vote on executive pay and proposed that companies publish pay ratios between the highest and lowest paid staff. In truth, this recent focus of attention is not new – we’ve all been here before. The Prime Minister’s proposed reforms will not be effective in either reducing the headline figure of executive pay (if indeed that is their objective), nor in making executives any more accountable. Unfortunately, May seems to have misunderstood the problem and is proposing measures which might be great politics, but are nowhere near radical enough to lead to substantive change. We are used to headline-grabbing controversies about the corporate elite. This has been going on for decades. In 1995, for example, the British Gas AGM lasted six hours as the CEO, Cedric Brown, had his 75% pay rise voted down while a was paraded to display unions’ discontent with executive “snouts in the trough”. These scandals helped to spark a series of major interventions in corporate governance. The growing divide between executive pay and the rest. Income Data Service, Author provided Get the party started Business leaders such as , and were invited to self-regulate. By 1997, it seemed self-regulation had done the trick. Left-leaning columnist Polly Toynbee triumphantly declared that finally, . The party, however, was only just beginning for the corporate elite. The system companies use to determine levels of executive pay is based on the recommendations of a 1995 committee headed by Greenbury, the former CEO & Chairman of Marks & Spencer. Their efficacy is rarely questioned despite ongoing controversies and the fact they are now more than 20 years old. Greenburys’ reforms were designed, among other things, to link pay and performance, so the pay of the executive team was in some way reflective of the value they bought to shareholders. However, there is a mass of empirical data produced by academics and policy centres alike, which indicates this relationship is malfunctioning. Research conducted at Â鶹´«Ă˝ and shows that the link between pay and performance was actually markedly stronger in the period before Greenbury. Critics will point to the as a mitigating factor in that, but clearly this suggests that the system adopted before Sir Richard published his report in 1995, actually represented a better system for remunerating top executives. In fact, LSE visiting Professor and Financial Times contributor, John Kay there is little evidence to support the view that bonuses, LTIPs (Long Term Incentive Plans) or share options increase corporate performance at all. has suggested it is organisational size, not performance, which is the key determinant of executive pay. Design issues The Prime Minister is simply focusing on the wrong issues. It is the foundations of the Greenbury-inspired system which are the problem, not the rules built on this flawed base. Research on voting patterns and shareholder engagement supports this assertion. First, if we look at shareholder engagement, there is evidence that shareholders are simply not holding boards of directors to account (on this issue and others). May has made corporate governance a central part of her plan. EPA/ANDY RAIN In a study analysing UK shareholder voting on pay, less than 7% of shareholders were found to either abstain from, or vote against, the director’s remuneration report resolution which effectively rubber-stamps pay deals. at Â鶹´«Ă˝ Business School illustrates that such involvement by pension funds – the de-facto owners of swathes of shares – was “more assumed than demonstrated in practice”. In other words there is a large question mark over the ability of the owners of capital to hold their agents to account in the traditional model of corporate accountability proposed by May. Sir Ferdinand Mount, a former advisor to her predecessor, David Cameron, wrote: We pretend that the shareholders possess powers that they effectively lost long ago, and we imagine that the behaviour of the corporation is disciplined by an array of checks and balances that are often no more than decorative today. Ownership of fools One of the reasons for this lack of engagement is that the nominal ownership of our top companies is becoming more diffuse; Professor Kay has called this the era of “”. What does this mean? Well, the that close to 60% of UK shares were held in nominee accounts and that just 10% were registered to private individuals. Shareholders who hold shares in nominee accounts are not listed on company share registers. These shares are held by institutions and as such the beneficial owner is not allowed to vote directly on matters such as pay. Boris Johnson at the London Stock Exchange. EPA/ANDY RAIN The key problem with this is that institutions can tend to act in very different ways than most shareholders would expect, or desire. The likelihood is that these shares are traded or loaned without the owner’s explicit consent. Investment firms might “churn” in this way on average over a year. Just as can make questionable investment decisions with your savings, your shares could actually be used to the same company you’re invested in, completely without your knowledge. This symptom of financialisation epitomises the view that it has long been more profitable in the UK to make money, than make things. It is the system which is broken not its rules. It is surely now time to admit that self-regulation is dead, along with the assumptions we’ve attached to the ownership of our companies. The corporate elite have tried and failed to self-regulate, now it’s time for a different approach. For instance, the idea of two tier boards, should be revisited. May has instead , and in doing so has made the mistake of being far too conservative. Instead of wheeling out a broken system and expecting different results this time around, surely now is the moment to be radical. , Research associate, This article was originally published on . Read the . 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