I know that the Institute of Directors surprised a few people when we started criticising directors’ pay at some of the UK’s largest companies. The Institute is there to represent these people after all, so shouldn’t we be defending them against such attacks? Our approach even led the Guardian, with whom we have not always seen eye-to-eye on business issues, to ask “what’s got into the whiskey at the IoD?”
In the last few years we have found fault with remuneration at household names including Sports Direct, Burberry and Barclays, and we have not held back from naming individuals. When oil explorer BG Group proposed to give incoming CEO, Helge Lund, a £12 million golden hello, we felt compelled to denounce the package as “excessive, inflammatory and contrary to the principles of good corporate governance”.
You may be sceptical, but I want to convince you that we have made these interventions not in spite of the principles on which the IoD was founded over a century ago, but because of them.
When the IoD was granted its Royal Charter in 1906, it was commanded to “encourage and foster a climate favourable to entrepreneurial activity and wealth creation”, and “to promote for the public benefit high levels of skill, knowledge, professional competence and integrity on the part of directors”. Yes, we have a duty to represent the interests of our 35,000 members, who lead businesses large and small across the country, but we are also compelled to champion competition which works for companies, shareholders and consumers.
Our first commitment, if you like, is to the free market. This means we need to smash the cosy complacency that has grown up on far too many boards over the last 15 years. The power balance at large numbers of Britain’s biggest firms has shifted in favour of management, against the interests of shareholders. In the FTSE 350, directors’ median total remuneration has increased by 232.6 per cent since 2000, while the market value of their companies has only increased 63.6 per cent. Profits have performed better, increasing by 95.4 per cent over the same period, but it’s clear that the link between pay and performance needs to be stronger.
Shareholders need to get more involved, and there have been positive signs recently, with significant rebellions over pay at the Annual General Meetings of Burberry and some of the banks. But real change will only happen when attitudes on boards are changed, and the group think that has prevailed on pay is eradicated. Part of the solution must be greater diversity on boards, in all of its forms.
The IoD’s new chairman, Lady Barbara Judge, is leading the charge to get more women into senior executive positions so that they can add a different voice in decision-making. Often overlooked, but highly important, is diversity of age. Only four directors in the FTSE 100 are under 40. Experience is clearly very important, but so are a variety of opinions, and understanding public and customer expectations.
The message does seem to be getting through. A survey of FTSE directors this week showed that a majority felt the executive pay model was broken, with remuneration only imperfectly aligned with corporate strategy. It’s crucial that this problem is not only acknowledged, but also acted upon. As proponents of the free market, the worst outcome from the IoD’s point of view would be heavy-handed government regulation. We have already seen how counter-productive the bankers’ bonus cap has been, but that unfortunately will not deter politicians looking for a headline. Boards must listen and change now, before the matter is taken out of their hands.
