Compulsion or Co-operation: Curbing Executive Pay

Andrew Moss, who has been in charge of Aviva since 2007, has become the third chief executive to quit amid increasing shareholder discontent in recent weeks, following David Brennan at AstraZeneca and Trinity Mirror’s Sly Bailey. Just what is going on with the public limited company, one of the great inventions of capitalism?

It has provided a flexible legal framework for dynamic activity and innovation for centuries. The structure really took hold and boomed in the late 19th century, when the first truly global, multi-national enterprises emerged. And it continues to be by far the most important building block of the Western economic system, which has delivered prosperity beyond the wildest dreams of previous generations.

For most of its existence, the joint stock company has operated without its validity being queried in the wider political economy domain. In the decades of rapid growth which followed the Second World War, for example, executives were well remunerated. But there was a general feeling that everyone was benefiting from the rise in prosperity.

But since the 1980s, there has been growing criticism of the way in which the corporate system operates. Many readers will recall the public vilification of one Cedric Brown, the hapless chief executive of the newly privatised British Gas. His ‘crime’ was to be paid the unheard of sum of £400,000 a year. Today, even allowing for inflation, most chief executives appear to require many times this amount simply to get out of bed.

The present crisis of public confidence in the institution of the public limited liability company was of course triggered by the financial collapse of the late 2000s. It is not just that confidence has been eroded. Outright rage has risen dramatically, with the protests often taking the form of demonstrations against capitalism itself.

The public appears to accept huge rewards when they appear merited. Footballers, film stars, rock musicians, the founders of Facebook and Google – very few seem to begrudge them what the Labour Party’s old Clause Four used to call, in its quaint way, ‘the full fruits of their industry’.

The real concern is of course what appear to be massive rewards for failure, combined with hostility to the enormous gap which has emerged between the rewards of the board and the remuneration of the rest of the workforce.

One response to the problem is what by now has become the knee jerk reaction of what we might call the interventionist class. The politicians and public sector bureaucrats who believe that rules can be devised to solve any problem. And preferably rules which are administered by themselves or by their peers in specially created agencies, replete with ever-rising numbers of support staff and gold plated pensions.

The alternative relies on a view of the world which is the complete antithesis of that of the would-be central planner. Just like the natural world, our social and economic systems are at heart evolutionary. They do not stand still. Behaviour changes, often in unpredictable ways, and at unexpected speed.

Much of our behaviour is increasingly driven not by the calculations of Economic Person, rationally weighing up the pros and cons of all the alternatives, pondering in splendid isolation. Instead, we act by copying, by imitating the behaviour of our peers. The principle is very familiar in the world of popular fashion. Remember Crocs? Shoes with holes in. Suitable perhaps for Arizona or Adelaide, but hardly for rainy Seattle or Scotland. Yet they swept the market. Once they became fashionable, people wanted them simply because others had them.

Copying or imitation exists at far more elevated levels. In the 1990s, it became fashionable to have an independent central bank. Yet it is hard to argue that the Bank of England, granted independence by Gordon Brown and Ed Balls, has covered itself in glory. And the European Central Bank was not exactly on the qui vive both before and during the financial crisis. The choice was hardly justifiable on so-called rational criteria.

We have seen exactly the same principle of copying operating in the shareholder revolts against what is often pure looting of the company by senior executives. James Caynes, for example, the chairman and chief executive of Bear Stearns, was paid $40 million cash between 2004 and 2006 and made millions more by selling his shares. He presided over the destruction of virtually the whole value of the shares in the bank during 2007. Many more have followed in his wake.

Yet it is only now that shareholders are exercising their power and calling companies to account. Their actions show the basic, fundamental strength of capitalism, its endless capacity to renew and recreate itself. But they also show the inherent unpredictability of the modern economy, the great difficulty of predicting the tipping point, when the consensus moves decisively in a new direction, almost regardless of ‘objective’ reality.

We have passed the tipping point. The fashion is for shareholders to become even more active, to devise new ways of holding executives to account for their performance and remuneration. More regulation, more red tape is the last thing that we need right now.