A Tory MP’s proposals to rein in executive pay by allowing remuneration packages to be vetted by shareholder committees have won the backing of Britain’s most influential fund manager.
Chris Philp, the MP for Croydon South, is also calling for shareholders to have a binding vote on pay at annual general meetings in order to keep a check on awards that could be socially divisive and bad for business.
Philp proposes forcing large companies to set up committees of their top five shareholders to approve pay deals before they go to the AGM. The committees would also recommend the appointment and removal of directors and question the board on strategy.
The company chairman and an employee representative should take part in the meetings, giving workers a voice, though neither would have a vote, Philp recommends in a paper published on Thursday. He says the employee should not be a trade union official and should be elected by all the workers.
Fund manager Neil Woodford has backed the proposals along with Lord Myners, the former City minister.
Woodford, who has scrapped bonuses for his employees, said that instead of looking for short-term gains, shareholders should take responsibility for ensuring bosses act in the long-term interests of their companies and the wider economy.
He said: “Regrettably, this view and approach is not shared by many in the UK investment industry and I believe the problem is getting worse … The initiatives in this paper represent important steps towards cultivating a more appropriate and valuable form of corporate governance in the UK.”
Shareholders already vote on executive pay at AGMs but the vote is not binding. Under rules introduced in 2013, there is a binding vote on pay policy every three years, but this has had little or no impact on pay levels. The average FTSE 100 chief executive earns about £6m a year – 150 times the average worker’s income, up from 70 times the average in 2002.
There were big votes against some bosses’ pay at AGMs this year, including the £70m deal for Sir Martin Sorrell at WPP and a majority opposing Bob Dudley’s £14m at BP, but such revolts are still relatively rare and are usually led by the same few fund managers.
Philp’s proposals, published by the High Pay Centre campaign group, add to the ongoing debate about pay and governance. Theresa May promised in July to reform corporate governance to rebuild trust between voters and politicians in the wake of the Brexit vote. Philp, who backed May for Tory leader, will meet the prime minister’s team next Tuesday to discuss his ideas.
Philp said: “Shareholders are not engaged and are frankly being a bit lazy. They are not active, energetic custodians of their own capital. A symptom of that is out-of-control executive pay – not just high amounts but also lack of alignment between pay and performance.”
Philp said his proposals were based on rules in countries such as Switzerland, the Netherlands and Denmark, which have binding pay votes, and Sweden, where shareholder committees have increased investor involvement.
He said fund managers were paid a lot of money and had the resources to put representatives on the committees. If they chose not to, their decision would be made public and the next biggest shareholder would be asked to attend, he said.
Myners, a former chairman of Marks & Spencer, said: “Chris Philp’s proposals will not be universally welcomed by either company directors or fund managers because they challenge the existing order that has suited these two communities so well. But implementation of his programme would represent a transformational change in the democratisation and accountability of ownership.”
