Lip Service

I’ll begin with  an assumption… Ed Miliband is right, we need more responsible behaviour from the boards of directors of companies in Britain. But its all very well for Ed to call for more responsible behaviour in the boardroom but this call is only lip serivce. For as anyone with even the most cursory knowledge of how public companies operate knows, two objectives override all else:

  • The board (aided by their chief executive officer) must ensure they maximise return for shareholders;

  • The baord will seek to maximise their own remuneration (a remarkably simple task in comparison to the same goal for ordinary workers as they are responsible for agreeing their own renumeration).

So it follows that any amount of rhetoric about responsibility will fall on deaf ears with no hope of leading to any meaningful change in behaviour. Particularly as the mass media has shown little or no willingness to engage in the debate; why would they when they are companies owned and run by the very same network of privileged individuals who sit on the boards of Britain’s bluechip companies?

What we really need to change behaviours in the board room are new rules that will enforce responsible behaviour. Of course this will be resisted quite simply because it will impinge on the primary objectives I’ve already set out.

Not coincidentally boards of director have an developed and deployed a number of extremely effective mechanisms to combat any efforts to make such a case. These mechanisms (e.g. lobbying ministers (I’m not sure how you or I would go about getting such an audience), media campaigns (it helps when you’re kin are the media owners), and the art of distraction) are used to promote a line of argument that maintains

regulation will seriously inhibit “free enterprise” and “wealth creation”. But these arguments are at best tenuous and at worst down right lies. There is no data available to support the claims of chief executives and their boards that sky high rewards represent effective means of incentivisation that drive performance; nor the contention that if we are to impose too much regulation companies and talented individuals will take their businesses out of the UK. Leading to less innovation, job creation and tax receipts.

This particular scare tactic is particularly dangerous as it appears to hold sway in the public consciousness, however, it is another deceit. If we first of all consider the prospect of talented individuals leaving the country and believe for a moment their departure would be a threat to our shared prosperity we overlook the very nature of competition and capitalism. Yet just as the Hydra in Greek mythology, when you cut off the head another one will inevitably grow back. The skills we’re talking about are not those of a professional footballer who is born with certain set of physical gifts; the skills of business can be taught. And in all of the most competitive environments where rich rewards await be they fame or wealth there is always cast of willing and able understudies waiting in the wings.

With respect to the prospect of entire companies departure, we can sleep easy as the process of moving a company, particularly if its primary market is the country in which it is based, is not only difficult legally and logistically but in most cases uneconomic. There are of course exceptions, primarily finance companies (NB some hedge funds have already taken this course of action), however, these companies employ relatively few employees and the argument that their spending supports other jobs is not clear-cut, as most accumulate their wealth and do not spend it on manufactured goods and services that create jobs for wider society. Instead they spend on investments in property (inflating prices), and other assets.

So what can be done if we are to do something meaningful rather than utter meaningless soundbites? Four complmentary solutions I’d propose:

  • Setting up a high pay commission, that is empowered to make meaningful proposals for limits on rewards that will it the statue books.

  • Limiting the number of directorships a single person can hold. This would prevent the cross pollination that means boards are comprised of a cosy pool of hacks striving for their own selfish ends.

  • Limiting the time someone can sit on a board. This would further re-enforce the previous suggestion.

  • Give shareholders a more meaningful mechanism of engagement in decision making by setting out more frequent and empowered shareholder meetings rather than one well manicured AGM where voting decisions are limited to take it or leave it options.

So come on Ed, don’t just tell us about how you’d like boards to behave, tell us how you’re going to make them behave!

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One Response to Lip Service

  1. Murray McRobie says:

    Yes Ed is right, boards of directors should be responsible. Further to that you are absolutely right in saying this isn’t very likely to happen unless Companies are forced to comply by legislation. We all know that when it came to banking self regulation meant no regulation. As you point out directors do constantly come up with excuses such as how the best talent will move unless appropriately rewarded etc etc.. Of people at the bottom of the ladder, the companies lowest paid employees are very often paid minimum wage – they apparently don’t need or deserve the same sort of incentive to stay with the company.

    I would suggest also that ALL public companies disclose ALL remuneration (as in, ALL, including such things as share options) of ALL their directors (individually listed not as one lump sum to the board) and also that of the top tier of management. Pay differentials have widened markedly in recent years (as Ed pointed out in his recent speech). This is due, at least in part, to the decline of labour share relative to capital. Also there is the fact that public companies are for the most part likely to owned by large pension funds and the cosy relationship between directors and fund managers where short term profits are all important doesn’t do much for the long term viability of the company and including the loyalty and motivation of it’s work force.

    So yes legislate and more accountability and openness.

    The Wall street crash of 1929 and the great depression on 1930’s was a time of very concentrated wealth. We certainly have very concentrated wealth once again – it remains to be seen if we are going down that same road. We live in interesting, if a little scary, times.

    Ed is probably doing a OK job but I do think he should be more radical and try to avoid the obsession of chasing the middle ground. For example Labour’s take on deficit reduction and government spending cuts is really only marginally different to that of the Government, just a few billion £’s of difference. They haven’t really made the case that growth (real growth) should come before cuts. What’s more I warmed to Ed when he acknowledged that Iraq was had been a mistake, I just didn’t like him speaking approvingly on Tony Blair in his recent speech. In my book the more distance he puts between himself and that sorry excuse for a Labour man the better.

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