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Greedy executives (and weak directors) or silly law?

  • March 19th, 2009

The  disgraceful insensitivity of the greedies taking bonuses from businesses rescued by taxpayers is driving some  US and Australian political responses.

Both encouraging seppuku and restoring shareholder control seem sensible to me, though the Aussie proposals would better focussed on director responsibility..

Simon Power should be reconsidering our law now, before some unfolding outrage here sparks a populist frenzy for similar changes. I’m surprised it did not develop after revelation that the Strategic Finance CEO was maintaining his salary after their moratorium was approved.

I’d start by repealing section 161 of our Companies Act 1993 and reinstating the simple previous law that required a shareholder vote to authorise director remuneration. The longstanding older law was consistent with the principle that the directors were the stewards for the owners, not the servants of the company. Accordingly the owners should decide what their stewards deserved for their stewardship.

The stewards in turn are then free to decide what the company’s employees should get.

Section 161 allows directors to set their own pay and retirement benefits, subject to being "satisfied that to do so is fair to the company", certifying to that opinion and entering the particulars in the interests register.

These procedures are more cumbersome than the old requirement for the topic to be addressed in the annual shareholder resolutions. Worse, like most procedural ‘safeguards’ they breed cynicism. Who knows what is "fair to the company".

The proxy for fairness is "what everyone else does". Worse it feeds a ratchet mechanism, because the conscientious need back-covering evidence of "what everybody else does". They commission expensive market research.

Naturally the market survey reports a range.

Only losers want to be below average in anything, and most people believe they are above average in both talent and deserts – so of course they decide it is fair to put themselves in at least the second quartile. If they want to show ambition for the company and themselves they’ll put themselves in the top quartile.

Lo and behold, the next time their figures get included in market survey, those in the newly lower quartiles have fallen behind. The cycle has a built in ratchet because it is self referential.

This leads to the second necessary reform – repeal mandatory reporting of executive pay over $100k and replace it with specific power for shareholders to demand that information.

The trouble with mandatory reporting is that it too feeds the ratchet. Setting a prospective executive’s pay has ceased to be a balancing of what he or she is likely to be worth to your business, against what they can get elsewhere, and what someone else nearly as good would cost you.

Instead it is a public statement about your business. Do you want to be judged as placing your business in the lower quartiles of comparable businesses, in quality of people, ability to pay, and ambition? No? Then ensure that your salary levels are pitched in the upper quartiles.

That in turn feeds the ratchet in the next Hay remuneration survey.

We may need to look no further than mandatory public disclosure for an explanation of the huge growth in the gap between shop floor worker and CEO From long term average multiples of around 10x, it has blown out to more than 30x in a number of surveys, but not in Asia, where the old "secrecy" has largely survived.

The dramatic blow-out roughly coincides with those silly law changes in the 1980s and 1990s.  




[…] Stephen Franks proposes that shareholders not Directors should approve Directors Fees. […]

  • Jim Maclean
  • March 19th, 2009
  • 5:45 pm

Once again, sound common sense to address a problem artificially created by someone with a bright idea.
Why wasn’t this guy elected to parliament?
Good on you Stephen, keep plugging away, there are many of us who appreciate your efforts even if some who should know better are still not listening.

[…] but the long term effect is simply to drive up the average cost of IT people across all sectors. As Stephen Franks points out, the ratchet effect is a major factor in top executive salaries […]

  • Rumpole
  • March 20th, 2009
  • 12:59 pm

Should the vote be resticted to non institional shareholders to avoid the old boy network?


I can not understand why Stephen Frank’s position was as it was on the NAT list, and it keeps me very cautious toward the populist leader.

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