Shredding Sir Fred – and friends

Rewarding senior executives for failure has become all too  common in recent years.  The £16 million pension awarded to Sir Fred Goodwin, former boss of RBS, may make him ‘media hate person of the day’ but his is only the latest in a long line of payments for destroying perfectly good companies.

Gordon Brown may view it as “unacceptable” and be taking legal advice about how to claw it back but surely we need to draw the general lesson here and not just beat up on one case – however offensive that case might be. 

And that general lesson should surely encompass the thought that all rewards – including salaries, bonuses and pensions – should be commensurate with results.   In other words the perfectly justified public anger over this case (and banking bonuses generally) could and should be harnessed to put through some long-overdue changes to corporate governance.  

In too many large firms the rights of shareholders (and that means most of us through pension funds etc.) have been expropriated by a breed of self-serving managers who serve no higher goal than short term greed.  It is too easy for a dominant Chairman to pack his board with yes-men who can be relied on to lock arms and push back against even the most determined efforts to question pay awards or strategy.  No wonder we are in a mess.

Corporate governance needs to move on from being the domain of buccaneers and kleptocrats to one of managers who actually serve the longer term interests of shareholders (and in practice therefore also of employees and the wider society). 

So what can be done?

I suggest that legislation to restore shareholder control is the democratic and effective way to go.  Legislate that directors of public companies may only draw a salary package up to a maximum of a specified multiple of average wages in their firm – say a generous 20x.  That should be more than enough for anyone to live on!   Any remuneration above this level (whether as bonus or pension etc.) would be subject to two votes by shareholders –   the first to agree and set up a bonus scheme and a second vote five years later to confirm (or deny) any sums awarded under such a scheme.

In practice the shareholders would be pension funds etc so they would use such powers responsibly and sparingly but the threat of being able to do so would be a powerful deterrant to bad behaviour in the first place.

If it turned out that the Directors had been utterly foolish and/or negligent then the shareholders would have the right to decline to pay the accrued bonuses.   However ,shareholders would be constrained to behave fairly and not unreasonably or they would find it impossible to attract and retain quality management.

Funds accrued could earn interest while in trust so there is no ultimate loss to the directors involved – only a delay so that any short-termism is exposed.

And just imagine; if such legislation were introduced in the next few months and backdated to late last year,  it might even catch Sir Fred.

That would seem perfectly fair.

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One response to this post.

  1. I completely agree with your suggestion that everyone should be rewarded based on results, though not just top execs. However, there are already checks & balances within large PLC’s whereby rewards are determined by a Remuneration Committee and approved in most cases, by the shareholders. The problem I belive, is that too many of the non-execs are cronies of the Chairman and/or other executive directors, some are, for example, wet behind the ears representatives of pension funds.

    I believe there is merit in your proposals, maybe with some kicking around of the detail, but equally, there are already supposed to be corporate governence rules and they seemed to have failed. We ought to be asking why? Every director of large companies will have professional liability insurance, if there has been wrongdoing, then we should be suing them.

    Reply

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