11th April 2012
New front opens on Barclays pay war
Now its the Association of British Insurers which has waved an amber warning letter at the bank's executive remuneration plans.
But is there any evidence that shareholder action against what some see as excessive pay reduces remuneration? Investors have been involved in this issue for the best part of two decades yet it still continues to ignite every annual general meeting season.
And what should be the response to online companies such as Amazon and Google which arrange their affairs to minimise tax in certain jurisdictions including the UK?
It could be time to bring in other stakeholders – such as customers and the wider community as taxpayers.
Amber top alert
In its amber top warning, the ABI tells members of its unease over one aspect of Diamond's solid gold package in particular. The ABI is concerned about a so-called tax equalisation package that saw Barclays hand Diamond a £5.75m "tax equalisation package" when he quit the United States to return to the UK. This ensured he was not penalised for his location change, and was paid on top of his other remuneration.
There is a substantial crossover between PIRC membership and that of the ABI. So there could be double counting of those institutions which have been asked to protest against Barclays pay packages. Faced with a 20% pro-Barclays board block controlled by Abu Dhabi and Qatar sovereign wealth funds, plus votes from funds which always back the management (in public at least), the apathetic and the deliberate abstainers, the ABI-PIRC combination is unlikely to win.
And in any case, until or unless the government enacts legislation, any voting down of the remuneration report or of any individual's pay is not legally binding on companies. They can ignore it or – better PR – promise "to note the matter, take it seriously, and learn lessons."
But here the ABI is boxing a little cleverer. Instead of attacking pay directly, it will focus on the Barclays tax equalisation deal as an example of poor corporate governance at the annual general meeting to be held on April 27.
Pay rebellion unlikely to succeed
Nevertheless, its concerns are likely either to be voted down – or, the fate of so many "shareholder revolts" not even reach the AGM agenda thanks to behind the scenes manoeuvres.
Once the annual meeting season is over, media interest could well diminish and move on to other issues. But it is arguable that without these "shareholder revolts", pay might be even higher.
For investors, it's not just a matter of bashing executives. It comes down to dividing up profits equitably between two sets of stakeholders – those who run the organisation and those who finance the company. Equity holders in Barclays feel they are getting a raw deal as they take the risks – a poor share performance over the past year – while those responsible for the lower profits enjoy big pay packages.
But as Barclays knows, there are other stakeholders besides investors. Back in the 1970s and 1980s, the Boycott Barclays campaign was successful in reducing the bank's market share in the UK and in persuading it to pull out of apartheid South Africa.
Shareholders and self-interest
The issue of online companies such as Amazon and Google to arrange their affairs to divert profits (and hence tax) to low rate jurisdictions is one that is unlikely to be picked up by activist funds or angry individual shareholders. Paying as little tax as possible, while sticking within the law, benefits the bottom line to the advantage of all investors, rather than recompensing individual executives. When shareholders see themselves well and rewarded either in dividend or capital growth terms, they will be reluctant to raise issues.
As the Barclays boycott showed, however, customers can make a difference – perhaps more than shareholders whose only final disapproval is selling their holdings.
Doctor Peter Corning, a director of the Institute for the Study of Complex Systems, Stanford University lecturer, and the author of several books on biology and society, proposes we should move to a "stakeholder capitalism".
The shareholder value model under fire
He notes that "the shareholder capitalism model has long been promoted by mainstream economists based on the simplistic assumption that human motivation can be boiled down to the rational pursuit of self-interest – the Milton Friedman view that "the social responsibility of business is to increase its profits" and that capitalist enterprises must focus single-mindedly on increasing "shareholder value" with anything else classed as "pure and unadulterated socialism."
But this model is, he claims, flawed. In the United States, firms paying low wages are subsidised by government benefits such as Medicare while here low wages are boosted by tax credits.
John Mackey, the CEO of Whole Foods practices stakeholder capitalism.
He says: "I'm a businessman and a freemarket libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of a business is to maximize profits. But that's not the purpose for other stakeholders – for customers, employees, suppliers, and the community. Each of those groups w
ill define the purpose of a business in terms of its own needs and desires, and each perspective is valid and legitimate. If investors don't agree, they can always sell. "
Training for AGM actions
Meanwhile the UK's Fair Pensions group is training for the forthcoming AGM season.
It organises training events where ‘shareholder activists' pick up the skills to hold company directors to account at annual meetings. The activists, who range from pensioners to students, are ready to ask tough questions of company boards.
It says: "As politicians of all parties and the media continue to talk about the high pay problem, these shareholder activists are preparing to question Remuneration Committee Chairmen and CEOs directly about escalating pay packages."
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