October 2018


Pro Governance

Promoting Good Corporate Governance









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Five Proposals to make Executive Pay benefit Society

It is refreshing to see that the (endless?) discussion about the level of Executive Pay is not completely dominated by pious wishes, hand-wringing and nebulous remedies.

So I read with interest the contribution from Alex Erdmans in a recent article published by CityAm. He is not only professor of finance at London Business School but also a member of the Purposeful Company steering group.

Here is a short summary of the key proposals Erdmans makes:

1 - Give only Equity and Option grants with a long vesting period, preferably until after the executive has left - or even retired.

2 - De-emphasise long-term Incentive plans or bonuses that are only tied to financial targets.

3 - Grant deferred cash compensation or similar long-term awards so that they are eroded in case of bankruptcy.

4 - Launch a Fair Pay Charter and consult workers on the Charter.

5 - Require a binding vote on executive remuneration when less than 75% of shareholders support pay proposals two years in a row.

But while these proposals are a valuable contribution the observer is left with two key questions:

How will these ideas actually be translated into concrete action? And by whom?

And the 64,000 Dollar question regarding the absolute level of Executive Pay is not touched at all. As with so many proposals about pay reform, this is really the elephant in the room. All technical remedies are pointless if at the end all they achieve is that pay is ratcheting higher and higher even when modifications in the way it is set are introduced.

The key question is: Why should an executive be awarded 5, 10 or 20 million if his pay is somehow 'aligned' with company performance? Ultimately this is a question of morality and not economics.

All very well to see BlackRock pledging 'to hold boards' feet to the fire' when it comes to executive pay' when the most critical question of executive pay reform - the way the absolute level of pay is set - is left open.

As always your Comments are welcome, but please no direct messages - please post your contribution on our associated Blog site to make sure that others can see and participate in the debate!




Less Talk, more Action!

That is my message to all those who are following the debate about corporate governance. While articles in learned journals and any number of conferences and think tanks dabbling in the subject are welcome and may bring some (slow) progress it is time that a more focused approach is pursued.

The real investors are twice removed from any influence in the corporate world - the original agency problem dates back more than two generations when management and ownership of major (listed) corporations became increasingly separated.

During the past few decades a second layer was introduced in the form of the institutionalisation of investment management which means that the actual investor has delegated all supervisory tasks to professional money managers who are supposed to protect his interest.

The only way that the interests of the real shareholders will be protected is if their fiduciaries in the money management world are motivated enough to put their interest above their own (commercial) interest

The top 100, maybe even only the top 50, investment institutions can - if they act together - influence the behaviour of all public corporations in a decisive manner. Given that the same institutions often are the main investors in the 'Private' Equity Industry this part of the economy can also be brought under the umbrella of the same governance rules.

The lack of appropriate forums to allow input from the real end investors is also a major gap in the governance debate and I will try to foster ideas and initiatives to alleviate and overcome this deficiency.

There is a lot of work to be done and I hope that all those with good will concentrate their minds on bringing forward actual measures rather then more empty resolutions.

I am looking forward to your comments - or better still join my effort by signing up to my mailing list. Please send me emails only if they relate to aspects of how to cooperate to promote the cause of corporate governance. General comments and suggestions should be posted on the Pro Governance Blog in the interest of transparency and in order to develop a community spirit.

Heinz Geyer



About Pro Governance

Our Mission is to campaign for the protection of investors and savers by promoting good corporate governance.

We also believe that the wider spread of share ownership is in itself a public good and may sometimes even be preferable to higher economic efficiency.

Shareholders in publicly listed companies are widely dispersed and cannot micro-manage the affairs of the companies they are invested in. The international nature of today's shareholder registers make this also impossible for large institutional investors.

On the other hand, abuses that have developed over the past few years make it imperative that company managements are supervised in a more efficient way.

Tax incentives and institutional constraints have favoured the growth of large institutional investors at the expense of small individual shareholders. This makes it more important than ever that these investors behave like fiduciaries and have the interests of their clients at heart.

This means that the business of money management cannot be treated like any other profit-maximising business. Like the medical, legal or academic professions the interest of the clients has to have priority when critical decisions have to be made with regard to companies the money managers are invested in.

We at Pro-Gov think that the establishment of an effective international forum combining representatives from the national organisations of individual shareholders and investors will be an effective step in the direction of improving corporate governance.

At the moment the corporate Governance discussion is limited to academics, journalists in the quality business press, institutional shareholders and companies and their business associations as well as politicians. The one party missing on the table are the real investors who - with some exceptions - voiceless in the debate.

"The scandal isn't what's illegal; it's what's legal"
(Michael Kinsley)






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