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You can find the current article at its original source at https://www.theguardian.com/commentisfree/2017/aug/31/executive-pay-broken-business-culture-disparity-ceos-workers
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| It’s not just executive pay – we must tackle our broken business culture | It’s not just executive pay – we must tackle our broken business culture |
| (13 days later) | |
| “Well done Sir Martin, you’ve lost loads of pounds in the last year – around twenty million in fact – and while you’re still some way above target weight, it’s definitely a step in the right direction. Let’s give him a clap.” | “Well done Sir Martin, you’ve lost loads of pounds in the last year – around twenty million in fact – and while you’re still some way above target weight, it’s definitely a step in the right direction. Let’s give him a clap.” |
| The government’s plans for corporate governance reform, announced this week, didn’t stretch to introducing Slimming World-style meetings for fat cat chief executives. But while CEOs may prefer to discuss their pay in private, this will soon no longer be an option for them. From next year the bosses of listed companies will have to declare not only what their overall package is, but how many times bigger it is than the pay of their average UK employee. This is a welcome move towards greater transparency on pay gaps. | The government’s plans for corporate governance reform, announced this week, didn’t stretch to introducing Slimming World-style meetings for fat cat chief executives. But while CEOs may prefer to discuss their pay in private, this will soon no longer be an option for them. From next year the bosses of listed companies will have to declare not only what their overall package is, but how many times bigger it is than the pay of their average UK employee. This is a welcome move towards greater transparency on pay gaps. |
| Wage inequality is also a symbol of something more fundamentally wrong in the business world. Too many corporations are competing to achieve the wrong results in the wrong way, led astray by perverse incentives that produce bad outcomes. And the excessive rewards for those at the top are a prize for the people who play this game best. | Wage inequality is also a symbol of something more fundamentally wrong in the business world. Too many corporations are competing to achieve the wrong results in the wrong way, led astray by perverse incentives that produce bad outcomes. And the excessive rewards for those at the top are a prize for the people who play this game best. |
| The last Labour government tried to encourage business to choose a better path. The Companies Act (2006) contains a much-debated paragraph, section 172, which sets out the duties of a company director: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard … to the likely consequences of any decision in the long term; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.” | The last Labour government tried to encourage business to choose a better path. The Companies Act (2006) contains a much-debated paragraph, section 172, which sets out the duties of a company director: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard … to the likely consequences of any decision in the long term; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.” |
| This text was a compromise and a (weary) triumph of drafting. It was an attempt to acknowledge, in law, that business should consider its impact on many stakeholders. But it has not changed the world. It has served, in practice, to enshrine “shareholder primacy”, that is, the idea that businesses should worry about their shareholders first and above all, before thinking about anything else. This is a bad idea with bad consequences. And it has proven hard to shake off. | This text was a compromise and a (weary) triumph of drafting. It was an attempt to acknowledge, in law, that business should consider its impact on many stakeholders. But it has not changed the world. It has served, in practice, to enshrine “shareholder primacy”, that is, the idea that businesses should worry about their shareholders first and above all, before thinking about anything else. This is a bad idea with bad consequences. And it has proven hard to shake off. |
| This is where the link to excessive CEO pay comes in. These complicated pay packages are structured to produce huge bonuses if share price targets are hit. The majority of shareholders are pretty impatient with businesses that do not deliver regular and repeated earnings increases over the short and medium term. The sort of long-term investment that might raise company performance many years from now, boosting productivity and wages for ordinary workers, is harder to push through. This in part explains why corporate Britain is notoriously sitting on a “cash pile” estimated to be as large as £700bn. | This is where the link to excessive CEO pay comes in. These complicated pay packages are structured to produce huge bonuses if share price targets are hit. The majority of shareholders are pretty impatient with businesses that do not deliver regular and repeated earnings increases over the short and medium term. The sort of long-term investment that might raise company performance many years from now, boosting productivity and wages for ordinary workers, is harder to push through. This in part explains why corporate Britain is notoriously sitting on a “cash pile” estimated to be as large as £700bn. |
| Instead of investing, what do corporate leaders do with all this cash? They pay “special dividends” to their shareholders, or buy back their own shares, thus boosting the share price and ensuring that their bonuses (so-called long-term incentive plans) will trigger a bonanza in two or three years’ time. That’s right: “long-term” is no more than five years away. Welcome to the dysfunctional world of high finance. | Instead of investing, what do corporate leaders do with all this cash? They pay “special dividends” to their shareholders, or buy back their own shares, thus boosting the share price and ensuring that their bonuses (so-called long-term incentive plans) will trigger a bonanza in two or three years’ time. That’s right: “long-term” is no more than five years away. Welcome to the dysfunctional world of high finance. |
| While the prime minister is in Japan this week, she may learn something about the patient, long-term support for investment and “continuous improvement” that helped build one of the most powerful economies in the world from the ruins of war. It is a country, incidentally, where the gaps in pay between corporate leaders and their employees are a mere fraction of what they are here. | While the prime minister is in Japan this week, she may learn something about the patient, long-term support for investment and “continuous improvement” that helped build one of the most powerful economies in the world from the ruins of war. It is a country, incidentally, where the gaps in pay between corporate leaders and their employees are a mere fraction of what they are here. |
| And as she flies back over Europe she might look down and consider that there are great European businesses that succeed over the long term without being slaves to short-term stock market sentiment. They even have workers serving on their company boards, an idea that proved too upsetting for many FTSE 100 businesses. | And as she flies back over Europe she might look down and consider that there are great European businesses that succeed over the long term without being slaves to short-term stock market sentiment. They even have workers serving on their company boards, an idea that proved too upsetting for many FTSE 100 businesses. |
| Will corporate Britain ever change its ways? It will take courageous leadership to look investors in the face and say that current plans for growth may not deliver exciting returns in the next five years, but should secure the company’s future a decade or more from now. | Will corporate Britain ever change its ways? It will take courageous leadership to look investors in the face and say that current plans for growth may not deliver exciting returns in the next five years, but should secure the company’s future a decade or more from now. |
| It is not even clear that the stock market is always the best place for an ambitious company to be. Consider the difficulties pharmaceutical companies have, for example, persuading investors that they need more time and funds to make worthwhile discoveries. And remember, as Prof Henry Mintzberg points out in his recent book Rebalancing Society, that penicillin, insulin and the polio vaccine were all discovered in not-for-profit laboratories. | It is not even clear that the stock market is always the best place for an ambitious company to be. Consider the difficulties pharmaceutical companies have, for example, persuading investors that they need more time and funds to make worthwhile discoveries. And remember, as Prof Henry Mintzberg points out in his recent book Rebalancing Society, that penicillin, insulin and the polio vaccine were all discovered in not-for-profit laboratories. |
| “Pay for performance” is the cliched phrase used to justify excessive CEO pay. But a survey covering 10 years of data published by researchers at Lancaster University Management School last year found a “negligible” link between spiralling top pay and good corporate performance over the same period. Meanwhile, HMRC reports that big companies in the UK may have underpaid tax by as much as £25bn in the year to March. All that money saved will have boosted profitability, and share prices. | “Pay for performance” is the cliched phrase used to justify excessive CEO pay. But a survey covering 10 years of data published by researchers at Lancaster University Management School last year found a “negligible” link between spiralling top pay and good corporate performance over the same period. Meanwhile, HMRC reports that big companies in the UK may have underpaid tax by as much as £25bn in the year to March. All that money saved will have boosted profitability, and share prices. |
| This month the management consultancy McKinsey & Company published an interview with a business school professor under the headline “Reimagining capitalism to better serve society”. The text underneath ran: “Capitalism has not kept pace with evolving societal needs, leaving more and more of the world’s population behind with respect to wealth creation and prosperity.” One more cautious sentence followed: “It may be time for a change.” It may indeed. | This month the management consultancy McKinsey & Company published an interview with a business school professor under the headline “Reimagining capitalism to better serve society”. The text underneath ran: “Capitalism has not kept pace with evolving societal needs, leaving more and more of the world’s population behind with respect to wealth creation and prosperity.” One more cautious sentence followed: “It may be time for a change.” It may indeed. |
| • Stefan Stern is a management writer and visiting professor at Cass Business School | • Stefan Stern is a management writer and visiting professor at Cass Business School |
| Executive pay and bonuses | Executive pay and bonuses |
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| Income inequality | Income inequality |
| Corporate governance | Corporate governance |
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