Company managers need to hand back control to shareholders
The systems that enable top executives to take home multimillion-pound paypackets need changing, says Merryn Somerset Webb. Shareholders need to take back control of their companies.
Companies belong to the shareholders, not superstar CEOs
(Image credit: 2014 Getty Images For Siemens)
I'm assuming that most readers have found enough things to worry about for 2017. But those who haven't might look to the Hebridean island of Rum, where Scottish Natural Heritage (one of Scotland's many charities devoted to protecting stuff) has announced that if someone doesn't give it £20m sharpish it might have to bulldoze Kinloch Castle, a castellated Victorian mansion variously described as "magnificent" and " remarkable" by its supporters, mostly other charities devoted to protecting stuff.
It's an interesting place, thoughnot so much for its architecture as its origins. It was built by the 27-year-old Sir George Bullough in 1900 as a pleasure palace. It had its own electricity supply (hydro); proper heating; a mechanical "Orchestrion" able to replicate the sound of a 40-piece band; some pretty impressive en-suite bathrooms; Scotland's first internal telephone system; and, to greet visitors on the way into the ballroom, a large nude portrait of Bullough's wife (drinking tea, as you do).
How, you might ask, did Bullough get the money for all of this (around £15m, inflation linked)? Simple: he inherited it all from his hardworking industrialist father, a machine manufacturing magnate in Lancashire.
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If you've spent some of this week thinking about Jeremy Corbyn's witterings on income inequality you're probably now thinking what I'm thinking: there's no need to knock the place down. No no no. Instead, all we have to do is wait for one of today's top chief executives to pop their clogs and one of their luxury-loving heirs to want their very own pleasure dome. Then we can flog it to them.
After all, if your dad has been pulling in £10m a year for ten years, you should, even after you've paid your inheritance tax, have enough to fix Kinloch's roof, redo the moss in the Japanese gardens and commission the yacht you'll need to get back and forth, with a few tens of millions left over. Buy in a few humming birds and alligators (yes, Bullough had these) and the job's done.
This, of course, brings us to Corbyn's first and totally correct point. Some people are really overpaid. If a chief executive can make enough money to change the fortunes of his family for generations to come in just a couple of years something only real entrepreneurs and risk-takers could do back in the days of Bullough's father we have a problem.
It also brings us to his second, also entirely correct, point: something must be done. Unfortunately, that's the end of the totally correct bit of Corbyn's thinking. His "something" in this case (the now-abandoned absolute cap on pay at a level somewhere above his own earnings) is similar to a lot of his somethings: it demands that we address symptoms rather than causes.
If we disapprove of the huge payments going to the top management of public companies instead of to their shareholders (at the bottom as well as the top of the size scale, by the way) we shouldn't demand legislation to stop it, we should look at the environment that allows it to happen and have a go at fixing that.
This is partly about giving more power to ordinary shareholders. Back in 1953 over 50% of UK equities were owned by individual shareholders. By 2010 that had gone down to 11.5%. Today we don't deal with our investments ourselves: we tend to hold our shares via middlemen fund managers of one kind or another and we rely on them to take care of corporate governance for us. We don't turn up at AGMs to argue over £5m here or there (usually no one tells us when the AGM is anyway). We expect them to do it for us. Unfortunately, they usually don't. So we need a system where the ordinary investor is re-engaged with the corporate world. Perhaps we should all be sent voting forms to fill in. And perhaps fund managers should be obliged to use our votes as we (rather than they) see fit. This might have been tricky ten years ago, but what with the internet, it really shouldn't be now.
At the same time, as Theresa May has suggested, votes on remuneration need to be binding. Shareholders are, in theory at least, the owners of listed companies. What they say really should go. And I suspect that, given the chance, what they will say is "enough with the entrepreneurial-style payments to mere managers".
But this isn't just about shifting power from manager to owner. It is also about the systems that create the results that allow managers to be so well paid in the first place. Think debt. Governments the world over allow companies to offset debt interest against tax liabilities, something that effectively favours debt finance over equity finance.
There are all sorts of consequences to this: as Andrew McNally points out in his book Debtonator, if companies habitually use debt instead of issuing new equity, the results of any productive activity always accrue to the same small group of people (note how the US equity market is actually shrinking, for example). This concentrates rather than distributes wealth.
And if companies use today's super-low interest rates as an extra incentive to finance more debt to buy back shares, they compound the problem. Share buybacks cut the number of shares in issue. That pushes up earnings per share, which then pushes up share prices, the combination of which has, of course, pushed up payouts from management incentive plans across the board.
The way we all treat debt could therefore be considered an interesting factor in both the wealth and income inequality debates.
Good news, then, that not only has the UK government been consulting on the matter, but that there is a neat little disrupter nestling in Donald Trump's corporation tax plans: the elimination of the ability to deduct debt interest in an attempt to put debt and equity on a level playing field.
Corbyn appears to agree with Trump on all sorts of things (protectionism, fiscal expansion, limited free movement of people and so on). If he really cares about inequality perhaps he can lobby for this Trump policy in the UK too (before Theresa May beats him to it). That would be interesting even if it did eventually mean Kinloch Castle being turned to rubble.
In the meantime, investors who want to stay on the right side of political trends might want to think about a fund that particularly focuses on avoiding firms with high levels of debt. McNally's Equitile Resilience Fund is a good place to start.
This article was first published in the Financial Times
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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