Growing shareholder activism highlights level of boardroom pay

London Briefing Chris JohnsIn the wake of the Enron scandal it is not surprising to see the words "corporate governance" starting to crop up with increasing regularity. In Britain, the spotlight is currently fixed on so-called fat cats in the boardroom and just how much they are paying themselves.

In a series of high-profile critiques, some influential organisations have been questioning the terms and conditions contained in the employment contracts of some of the country's most well-known business people. The list includes many household names.

The charges being laid at the door of these companies vary, but usually amount to saying that the pay of some of the top managers is too much, or that shareholders are not being given enough information about executive remuneration.

Essentially, after many decades of inertia, the owners of these businesses - shareholders - are getting interested in the management of the companies they purchased. It is not so much the lavish pay that is annoying shareholders but how little is sometimes delivered in return.

The most common question being asked is "why are we paying so much for such mediocrity?" The loudest critics are the National Association of Pension Funds and the Association of British Insurers, both representing the interests of owners of large swathes of British companies.

Also attracting a lot of interest is the Higgs report on the role of non-executive directors. This seemingly arcane document has prompted furious lobbying of a hitherto obscure body, the Financial Reporting Council. Many people apparently do not like the proposed dilution of the power of company chairman and/or chief executives to make boardroom appointments.

Making corporate executives more accountable and responsible for their actions would seem to be relatively uncontroversial. So would the attempts by shareholders to stop failed executives walking away with millions - "paying for failure". That none of this is playing well in some quarters is hardly surprising either.

If there existed a proper labour market for senior executives, where the laws of supply and demand operated as they should, none of these problems would exist.

The marketplace would ensure payment for performance and would punish the incompetent. So why is the market for top people failing? Actually, it probably isn't as bad as the headlines would suggest. Just as the rewards for football club managers are pretty generous for average performance, so too, it seems, in other businesses.

The lives of boardroom executives are as short these days as those of some premiership managers - it's about high risk and reward. Nevertheless, it is right that more executives should be subject to more shareholder scrutiny.

How do people actually get into British boardrooms? The best description of how most people probably think about this is to be found in Jeremy Paxman's book, Who Rules Britain. Paxman describes a Britain that has changed, but there are still too many echoes of the past. Too many institutions, not just some businesses, are run by the same sort of people that would have been in charge 50 years ago.

"A public schoolboy who went to Oxford and became a lawyer." This description could be applied to most British prime ministers - and other leaders - of the last two or three hundred years. It is a perfectly accurate description of Tony Blair.

Not all companies are guilty of excess, of course. But those institutions making waves about boardroom pay are making some valid points. There are some mediocre managers earning too much. But if that is the worst that can be dug up then we are in relatively good shape. Britain probably has the least amount of corporate corruption in the world.

Nevertheless, it is surely right that shareholders take more interest in their employees. Britain has some world-beating companies.

If we are to acquire many more it is important that the people who run them are the best and that they are remunerated accordingly.

Chris Johns is chief strategist with ABN AMRO Securities, London. All opinions expressed are entirely personal.

cjohns@eircom.net