Lord Myners: “one of the ironic failures of governance has been executive remuneration”
09 February 2010
At the NAPF Corporate Governance Seminar in London, Lord Myners said that if UK banks had reduced dividend payout ratios by a third between 2000 and 2007, it would have generated more capital than that supplied by the UK government during the crisis.
Lord Myners raised the following issues during his speech at the NAPF Corporate Governance Seminar in London:
Importance of Governance. He said that “No-one wants corporations, run by senior executives in their own interest rather than in the interests of shareholders. But seemingly, few want to ‘do governance’; they are content to “free-ride” on the efforts of others to hold boards to account.”
The picture he presented is one that has led us to what he has characterised as “the ownerless corporation”, reflected in fragmented share registers and non-existent or inconsistent investor engagement. The true owners, pension fund trustees and others, have been inter-mediated out of the story by agents who do not think and act as economic theory would tell us to expect of owners.
Remuneration .One of the iconic failures of governance has been executive remuneration. He posed several questions such as :”Is the rise in salaries a reflection of contraction in the supply of talent or an increase in the demand for talent? Or have the demands, pressures and stresses of work risen over the past five decades, requiring this to be reflected in compensation?”
Supply of talent has surely increased with higher educational achievement, the increasing number of business school graduates and in response, of course, to powerful price signalling through remuneration trends relative to other occupations. Demand for leadership and talent seems to me to be no greater now than when I first came to work in the City 35 years ago – even then we had large and complex companies that needed good management.
It seems to him that one explanation that sits comfortably with observed behaviour is the absence of an effective voice of ownership, as a consequence of multiple changes that have weakened the relationship between shareholders and companies, including internationalisation of ownership and increased investment portfolio diversification, leading to a diminishing interest in company specific governance.
Relevant to issues connecting bank remuneration and the interests of shareholders is an observation made by Andy Haldane of the Bank of England, who recently noted:
"If UK banks had reduced dividend payout ratios by a third between 2000 to 2007, £20bn of extra capital would have been generated. Had payouts to staff been trimmed by 10%, a further £50bn in capital would have been saved. And if banks had been restricted from paying dividends in the event of an annual loss, £15bn would have been added to the pot.
In other words, three modest changes in payout behaviour would have generated more capital than was supplied by the UK government during the crisis."
Lord Myners concluded by saying that “Government should not seek to intervene when there are perfectly practical ways in which investors can act in their own interests – using their voice and influence to deliver satisfactory outcomes. When, however, poor governance requires the taxpayer to pick up the tab, there is a role for Government and regulators. We will work to implement Sir Walker recommendation throughout the coming year, including requiring much greater disclosure on remuneration.”
© HM Treasury
