There is something deeply satisfying about the so-called shareholder spring. It is good to see institutional investors finally doing something of what we all pay them to do – demanding value from the corporate sector.
And it is good to see some of the worst offenders in the corporate world finally being called on the ‘talent myth’ and their many years of institutionalised delusion (something I’ve written about many times here and regularly tweet about at @merrynsw).
But don’t make the mistake of thinking that the nation’s institutional investors are suddenly rising as one in a moral crusade against outrageous pay and corporate complacency. They probably aren’t.
The fact is that the nation’s fund managers can’t really be trusted with this one. They should have been on top of all this years ago. Academics and journalists have been writing about – and warning about – the transformation of executive pay into institutionalised theft for years now. But the fund management industry –which one way or another represents us all – has done nothing about it.
Ask them now and they’ll say they have been working behind the scenes on pay for years. When I asked one of the big managers at Fidelity last year why they never did anything about high pay, he replied: “how do you know we don’t?” Hmmm. Possibly because directors’ pay in the FTSE 250 is now 262 times that of the lowest paid workers; or perhaps because US chief execs now earn 380 times the average wage.
You can argue about why so little effort was put in to all this, but I suspect it all comes down to the fact that the sloshes of money knocking around the bull market made it unnecessary. As long as there was enough in the way of returns to keep up the myth that everyone always makes 6% a year, and as long as there was a way to pretend that performance related pay worked, investors weren’t complaining, and neither was the government. Most people believed, as the FT puts it, that “outsize executive pay packages benefited them because they aligned manager incentives with investors’ interests”. They don’t any more.
The tide going out, as Warren Buffett always said it would, has exposed the overpaid for what they are. There is no longer enough in the way of returns for a fund manager to pocket his usual take and have enough left over to keep the investor (the owner of the capital in question) happy. This has made clear to investors the discrepancy between their returns and the returns of those they trust their money too.
And when I say “those they trust their money to”, I don’t just mean corporate executives, I mean fund managers too.
If they want to keep the spotlight off their own incomes (up 18% in the last 12 months, according to Ian King writing in the Times) they need at least to start looking like they are earning them. That means somehow converting some of the cash long earmarked for executive pay into cash earmarked for shareholder pay (not buybacks, by the way, but dividends – more on this here).
Let’s not forget, as Matthew Parris says in Saturday’s Times, that one of the surrogates “for attacking reality is to blame other people”. So the “Germans attack the lazy Greeks. The Greeks attack the bullying Germans. The French attack Anglo Saxon economics. The British attack the bankers.” And of course the fund managers then attack the CEOs. As the Sunday Times so rightly notes, given the anger everywhere, no one wants to be seen to be the one who didn’t protest against the next “Goodwin pension”.
Fund managers also need to be seen to be doing something if they want to have any hope of heading off Vince Cable and his plan to make shareholder votes on pay binding (hands up who had the faintest idea pre-crisis that they weren’t binding…). The fund management industry might be out there gunning for real change but, with just enough genuine exceptions for me to hang on to my faith in human nature (the managers at First State have been on this for years, for example) it probably isn’t doing it with your interests particularly in mind.
And as soon as it can get back to work gouging your pension savings, inventing opaque criteria for its performance fees, and tracking any old index with impunity, that is mostly what it will do. Making money for you or making money out of you? Let’s not forget that the fund management industry didn’t seem remotely bothered by excessive pay until a few years ago. But now, all of a sudden, 95% of institutional investors asked by The Share Centre, say that think that executive pay is too high.
All this means retail investors will need to keep the pressure on. Instead of leaving it to the big fund management companies (with their not particularly impressive record on the matter) we need to do it ourselves – as far as we can.
So what do you do if you want to have your say on executive pay and you aren’t an institutional investor? Vote where you can and make sure that your fund managers both vote and use their vote properly too (they don’t always vote and even when they do they aren’t transparent enough about it). I’ll have a look at how you can do that in this week’s magazine. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)