Two FTSE 100 companies, including BP, one the biggest of the bunch, were defeated on votes on boardroom pay last week. It doesn’t happen often, and the 59% revolt at BP was stunning. The company had followed its established pay formula, shown its workings and pleaded its case to normally timorous fund managers. Yet the majority of shareholders took a simple view: you’ve got to be kidding if you think £14m for chief executive Bob Dudley is fair.
A string of other companies with annual meetings in coming weeks will now be nervous. All will have expected healthy majorities but, after BP, confidence will be dented. A defeat or two in the following list is suddenly possible: WPP, which is a serial offender in the eyes of some shareholders; miner Anglo American; Dettol-to-Nurofen group Reckitt Benckiser; and pharmaceuticals firm Shire.
What’s happened? The narrow explanation – and the factor which took BP by surprise – is that investors are now looking at the sheer size of some bosses’ pay packets.
For the past two decades – as the “pay for performance” mantra has dominated – companies have concentrated on designing performance yardsticks to justify soaring pay levels. The intervention of Vince Cable, business secretary in the coalition government, encouraged that thinking by introducing a forward-looking binding vote on pay policies in 2014. The idea was to make companies gain approval, in advance, for their pay parameters on a three-yearly cycle. Once everyone had agreed the rules, ran the theory, the pay game would be less contentious.
Not so, it turns out. Dudley’s £14m adhered to BP’s approved polices – targets for safety, cash flow, etc were hit – but the sheer sum of money was deemed offensive, especially when BP had made a record $6.5bn loss. In the lingo of remuneration consultants, the problem was “the quantum”.
About time, too. The average chief executive of a FTSE 100 company was paid £4.96m in 2014, or 183 times the earnings of the average full-time UK worker, according to the High Pay Centre. Even if every penny could be referenced to performance-related criteria, the sums are staggering.
Sane voices in the business world warn that the system is out of control. “We have to call a halt somewhere or you will be moving into the hundreds of millions before we know where we are and that will not be tolerated by wider society,” said Simon Walker, director general of the Institute of Directors, after the BP vote. Fair comment.
But here is why such warnings may not be heeded. First, we’ve been here before. The ill-named “shareholder spring,” which led indirectly to Cable’s reforms, happened in 2012. Several FTSE 100 firms’ pay reports were voted down and, for a while, companies reined in their wilder ambitions. But the gravy train was far from derailed. It was more a case of a light touch being applied to the brakes until the fury died down. There is every chance the same will happen again.
Second, the police officers on pay are, ultimately, still the highly paid fund managers, whose mood is heavily influenced by share prices. Would the revolt at BP have happened if the oil price, and thus the company’s share price, had been higher? One doubts it. When the next bull market arrives, the pay accelerator will be hit again.
Third, the BP vote – and that at Smith & Nephew, the other defeated firm – was merely advisory. It was not a Cable-inspired three-yearly binding vote that would compel the board to do something. Both companies can ignore the protest and promise softly to listen harder next time. That’s not the stuff of revolution.
Instead, the furore over Dudley’s £14m may be remembered as remarkable at the time but, in the end, only a minor landmark. Real reform of a rotten system will only happen if shareholders have binding votes every year on actual pay awards, as opposed to outline pay policies, and if investors are then prepared to wield that power. We’re still a very long way from there.
A taxing dilemma
Public support for higher taxes is low. Demands to save public services are growing. How to square the circle? Some suggest that increased efficiency will improve public services. While there are some gains to be made from radical reforms, the limits here are obvious as NHS trust deficits soar, teacher shortages grow and local authority spending cuts bite.
So maybe there is a way to switch around how we pay tax and at the same time increase the amount collected? Let’s say we scrap inheritance tax in favour of a tax on the beneficiaries. In that way, lottery-style gains on property would be taxed as a capital gain or as part of income. That could be both a reform and a tax-raising manoeuvre. Bringing back the 50p tax rate is another possibility.
But the latest research suggests this kind of thinking is for the birds. Bernie Sanders and Jeremy Corbyn may want to impose higher taxes on the wealthy, but not many other people do. That is according to polls of attitudes across all developed countries – and why inheritance tax has already disappeared in Sweden, Canada and Australia.
There are good reasons to tax property and land, especially as they cascade down the generations, entrenching privilege. The trouble here is that such wealth is quite widely spread compared with previous generations, even though the top 1% have maintained their lead on everyone else.
Surveys pulled together by New York University politics professor David Stasavage and Stanford political scientist Kenneth Scheve in their new book, Taxing the Rich: A History of Fairness in the United States and Europe, show that gains on the stock market and soaring house prices are akin in most people’s minds to lottery wins and considered a windfall. These are lucky breaks that might happen to me one day, people think, so there is no way they should be heavily taxed.
That leaves only a consensus for ending tax avoidance. In this way hedge fund managers will at least pay the same tax rate as their cleaners. Given the rate at which tax is avoided, that is a big project in itself and could save lots of public services.
What if China buys Port Talbot’s steelworks?
Now the real fight begins for the future of Port Talbot and Tata Steel’s UK business. Tata and the government have officially started the sales process for the Indian company’s UK sites, with financial advisers hired and information memorandums sent out to potential buyers.
The mood among those close to the process is gloomy, with senior sources calling the prospect of finding a buyer for the whole business “remote”.
After all the talk from Sajid Javid and the government about potentially “co-investing” with a buyer, this is when they must roll their sleeves up to try to actually attract that buyer.
The fact that Tata Steel is getting Standard Chartered to trawl through the Asian steel market for a purchaser raises an interesting prospect. What if China – the country blamed for harming UK steel by dumping products – provides the potential saviour? Buying Tata Steel UK would certainly be one way for Beijing to get around the tariffs being imposed on its own steel.
