Accounting professor Prem Sikka puts forward research data that casts doubt on government plans for shareholder empowerment.
The recent report from the High Pay Commission observed that there is rarely a link between directors’ incentives and the way a company performs. While the average year-end share price declined by 71% in the past 10 years, the average annual bonus for FTSE 350 directors went up by 187%.
The average pay levels of workers rose only by 10% during the same period.
The UK government is now proposing to clamp down on executive pay by giving shareholders the power to veto rewards. But this assumes shareholders are the owners and main risk-bearers of companies. This is not the case.
Data on corporate shareholdings indicate that increasingly large stakes are held by traders and speculators who have little long-term interest in corporate governance and remuneration.
In spite of privatisations marketed to UK citizens with shares at knockdown prices and tax incentives to encourage people to buy shares in companies, individual shareholdings have dropped significantly over the past four decades. At the same time, foreign ownership by oligarchs, sovereign funds, offshore funds and private equity investors has risen, as this table illustrates:
If foreign investors choose not to vote on executive remuneration packages, the UK government is hardly in a position to impose sanctions. Iinsurance companies, pensions funds and banks hold shares on behalf of individuals, but they do not have the right to appoint directors or mandate managers of these organisations to vote on AGM resolutions. The remuneration of managers of financial institutions set the benchmark for corporate pay levels, so their incentives for curbing executive pay are low.
The banks themselves provide a further example that undermines the argument that shareholders bear the main risks of a business. A look at the leverage ratios (assets: equity) of many banks shows that shareholders do not bear the main risks or provide most of the risk capital.
In 2007, Barclays Bank had a leverage of around 39:1; Royal Bank of Scotland 31.2:1; HSBC 21.3:1; Lloyd’s TSB 31:1, Lehman Brothers 31:1 and Bear Stearns 33:1.
These ownership patterns show that shareholder empowerment is unlikely to solve the problem of excessive executive pay. They also pose some difficult questions for accountants.
Accounting rules and standards assume that accounts are prepared and audits conducted on behalf of shareholders, but the average duration of shareholdings in listed companies was estimated in 2007 to be 7.5 months. Annual reports and the information they contain have lost their relevance and meaning. These days, does anyone bother to read the accounts? And if they did, would they reveal the true extent of the leveraged assets and hedging risks that many corporations carry?
These questions will need to be answered first if the government’s programme for corporate democratisation is to have any chance.