Should shareholders vote on directors’ pay?
Today’s newspapers and TV political programmes have been covering the government’s announcement that they intend to tackle ‘fat cat’ rewards for under-performing directors of failing companies by legislating that in certain circumstances director packages are approved by a company’s owners.
As a corporate lawyer who often puts together equity investments in smaller private companies for both investors and entrepreneurs, the governing documentation of the deal, including the investment agreement and any director service contracts, will always contain thoughtfully negotiated provisions relating to director remuneration. The investor will not want to see his hard earned money unnecessarily wasted. This contrasts sharply with what seems to happen at public companies.
Even though UK public companies are so much larger and much better equipped to deal with regulatory overload in other areas that affect their business, the prevalence of non-owning directors of PLCs, their success at lobbying governments and the separation of inadequately incentivised funds as the legal owners of public companies while the beneficial owners are ultimately individuals who trust pension funds with their money, have all combined to mean that regulation concerning director remuneration is weak, as a result of which for years increasingly absurd stories have surfaced in the press about inept directors being well rewarded for abject failure. In my mind the situation seems like a form of institutional and legalised fraud that has become commonplace.
I do not believe that additional regulation is often the solution to any problem and people will argue that there are already laws that shareholders can use to protect their position, while shares in public markets are easily transferable should shareholders be really dissatisfied. However, shareholders still seem to suffer unnecessarily from directors benefiting from mismanaging their companies. Given the advances in electronic communication and digital technologies, having a mass of shareholders vote on a particular issue shouldn’t be an administrative issue, particularly if votes are restricted by de minimis limits to material contracts, especially those containing substantial payoffs should a director leave for whatever reason.
While the current debate is about protecting company shareholders from self-interested directors, the same arguments can be made in relation to government officials and civil servants vis-a-vis the taxpayer, as well as trade union leaders deciding what to pay themselves out of membership funds and, scandalously, also being entitled to additional payments from the taxpayer. Unlike shareholders, who are already protected to a degree from a large body of company law, taxpayers do not have the benefit of any such protection other than being able to vote at election time every few years.