A few weeks ago, Nicholas Wrigley, the chairman of housebuilder Persimmon, resigned. He did so because on his watch a remuneration package was created to pay the chief executive £107m by the middle of next year. That’s an insane amount of money for a manager of a listed company to earn.
The company’s shareholders are quite right to be cross, and Wrigley quite right to resign. He was a fool both not to insist on a cap on the bonus structure and also not to grasp the politically charged climate around the executive pay debate even back in 2012 (when the incentive deal was passed). But, that said, there’s a problem with blaming only the board and executive greed for this kind of thing.
You also have to ask how on earth the shareholders let deals such as this go through. The answer is rather more complicated and uncomfortable than it should be. To get to it, we need to look at the ownership structure of shares in listed companies today.
In the 1960s, more than 50% of the listed shares in the UK were held directly by individuals – who received company reports and were able to vote at annual general meetings in what we might call a shareholder or investor democracy. By 1990, that was down to 20%; today it is closer to 10% – most people hold what equities they have via the fund management business. And even those who do hold individual shares do so via a platform of some kind, which makes it hard for them to claim the usual trappings of share ownership (be they AGM votes or shareholder perks). Whether they intended to or not, they have contracted out all governance functions to an agent.
This is all extremely convenient. But it also has several very unhappy side effects. The first is a lack of connection between the final beneficial investor and the corporate world. If you simply hold, for example, funds from Fidelity or BlackRock, as far as you are concerned your relationship is with the fund manager not the company. Most UK investors who hold equities via funds as a result of, for example, pensions auto-enrolment, will not have much sense of how their finances rest on the fortunes of actual companies. They will know they have “a pension” but not which companies they own; therefore, they are unlikely to have much interest in how government policy (from interest rates to minimum wages) will affect those businesses.
If one of the core ideas of shareholder capitalism is that electorates vote for business-friendly policies on the basis that one way or another they get a cut of corporate profits, where does this new lack of connection leave us? Note that trust in chief executives is at an all-time low in the UK.
The second unhappy effect is the one we see in action with nutty pay policies. It is that our agents (fund managers in general) don’t necessarily see things as small shareholders might. If you make a few million a year as an asset gatherer at a huge fund-management firm, a long-term incentive scheme at another company that transfers several tens of millions of pounds from shareholder pockets to managerial ones might not seem unreasonable to you. But it might seem unreasonable to a 68-year-old trying to eke a post-pension-freedom income from a lump sum of £150,000 and the UK’s meagre state offerings.
The same goes for all sorts of things. Take mergers and acquisitions. If you are a fund manager holding an investment that attracts a bid at a 40% premium, you’ll vote to take it. Can’t be bad for the performance numbers on which your bonus is based, can it? But is that what the pensioner, who was enjoying the steady growth in the dividend yield from the same investment, is also likely to do?
Pointing out that short-termism in investment is a problem is not exactly new. But most of the solutions on offer involve haranguing fund managers to change their generally dismal behaviour. It might be better to help them out with their difficulties by bypassing them in the decision-making process. Forty years ago, the beneficial owners of shares – those entitled to the cash from the dividends and on wind-up – were the ones voting at AGMs. Why not change the structure of the investing world and make that happen again?
There is no reason, with the data management abilities that the platforms and the listed companies have, not to allow those who own individual shares to vote directly. And there is also no reason why investors in funds should not get a say, too. Why should voting rights not be considered on a “look through” basis to the final beneficial owner and their votes be reflected at AGMs? Until recently, the argument that this would be far too complicated might have held some water – who could create an accurate, private, fractional database like that? Post blockchain, I’m not sure it does any more.
Shareholder capitalism clearly needs to be rebooted for this age. Adding democracy back into it is a good place to start. With auto-enrolment and pension freedom, most adults in the UK have a stake in the listed UK corporate sector. They should know that – and be able to act on it.
• This article was first published in the Financial Times