John Glen MP: Executive pay must become a new component of corporate social responsibility

John Glen is the Member of Parliament for Salisbury.

The debate around how best to deal with unfair pay – where the salaries of top executives rise irrespective of performance and often contrary to it – has provoked a range of suggested solutions. Some legislative changes can make shareholders’ votes over pay more binding and the relationships between remuneration committees can be purified. However, for my part the long-term answer lies in addressing the broken mechanism by which shareholders should theoretically express their views.

The immediate response to high executive pay from a Conservative perspective should be to look to the decisions of the shareholders  - in who they elect to the board and what resolutions are passed over pay. However, despite its initial appeal, the notion that armies of individual shareholders will vote down an excessive pay settlement for an over-paid Chief Executive is unlikely to work out like that. Most people who invest in a company don’t do so as an active individual investor; instead they put their money in an investment product managed by an insurance company, a pension fund or a fund manager. It is these investment managers who decide which companies to invest our money in and who act as custodians of the individuals’ shareholder rights: and it is to this group that we need to look as the people who will control the granting of senior executive pay packages.

At present we need to ask why fund managers don’t focus on executive pay when determining their investment strategies. A cynic might say they overlook such details as their own pay packets can involve eye-watering numbers - and by avoiding making an issue of the pay of the senior executives of the companies they invest in, they avoid serious scrutiny of their own salaries. If one takes a less cynical view, we could deduce that they do not focus on salaries of executives because their primary purpose is to maximise returns for their investors.  Quite reasonably, after all, they see themselves as fund managers not agents of social policy.

As long as individual shareholders are content to exist as passive, arms-length shareholders who have consciously given the rights that go with the shares they own to fund managers who buy and sell them to maximise profits then little will change. At present there is a clear understanding - the maximisation of return for the arms-length investor wins over a concern of the pay levels in the companies that deliver those superior funds.  Until the buyer values of the individual investor change, the fund manager will continue to execute the investment decision on the individual investor’s primary concern – an increase in the value of their investments.

In recent months, set against the shroud of a prolonged period of economic uncertainty and a lack of significant growth, there has been a heightened awareness of the pay levels of those at the very top. I do wonder, would this issue have risen up the collective political consciousness, if we were in a boom time in which we were seeing healthy returns on investments? Would anyone care how much a few at the top were being paid if the value of their own investments was rising steadily?

Regardless of how we answer this, it is surely right and fair that we do not throw our hands up in the air and say “we can’t do anything about it”. It seems to me we have two options. We either regulate – specifying parameters for pay and setting out rules on how the relationships with performance should work – or even, as my colleague Matthew Hancock MP suggested yesterday - introduce a law that makes it possible to prosecute executives for serious financial recklessness.

Or we undertake measures to make executive pay and the relationship with performance transparent and allow the public access to the information which tells us where our money ends up. If over-inflated pay becomes such a priority it will very quickly become unacceptable for fund managers to invest in a firm that does not take the pay levels of its senior execs seriously. Instead it will become commercially suicidal to offer investment products which involve buying shares in firms where pay settlements are offered that do not relate to performance.  In turn this will stimulate a change in behaviour by companies who need continued access to finance from the aggregated funds of the passive shareholders.

A generation ago, “Corporate Social Responsibility” was a buzzword of those who trumpeted a new role for business; one whereby businesses actively sought to comply with the spirit of the law, ethical standards, and international norms. Today “CSR” is embedded in most business leaders’ DNA, it is universally studied in business schools and we have meaningful metrics such as the FTSE4Good Index series to tell us who is taking a range of issues seriously.

Today’s challenge is to make the relationship between board pay and performance an important metric that all potential investors look at when they weigh up which fund to put their money into. It is in this way that shareholders can genuinely hold management to account and take responsibility for the firm that they own. This is a Conservative solution – not more regulation, but more information and choice - let the real investors decide, not the cartel of Chief Execs and Fund managers who have no incentive to open up in the current regime.