Ground To Make Up

Charles Moore writes:

Sir Martin Sorrell, the chief executive of WPP, whose almost £13 million-a-year pay package provoked a shareholder revolt this week, is quoted as saying that he has “skin in the game”. He means that, as well as being an employee, he owns some of the company. He buys, and is also awarded, shares in WPP. The bulk of his large fortune lies there and so, he argues, his commitment is total.

Clearly the shareholders of WPP decided that Sir Martin has not just skin in the game, but fat. They want to cut it out.

I am not qualified to say whether the shareholders are right in Sir Martin’s particular case. He has led the company for 27 years and brought it great success. On the other hand, he is widely viewed as arrogant, and as taking an increase not justified by recent results. He would say that he puts his money where his mouth is. Critics would say that mouth and money have grown too big.

But the Sorrell concept of “skin in the game” (original copyright, Warren Buffett) is the key to the whole debate about executive pay. This is a debate about ownership.

Left-wing people say that excessive salaries for executives prove the evils of capitalism. Highly paid executives warn, as does Sir Martin, “Do not fiddle with the market mechanism”. Both sides have it the wrong way round. Massive executive pay, particularly in current circumstances, is anti-capitalist and anti-market.

Capitalism is a way of owning things. Shares in public limited companies make it possible for millions of people to have a bit of skin in the game. The company is, collectively, theirs. Executives are their hired hands. The job of the executives may be very important, but it is, in essence, the same as that of the rest of the workforce – to produce a good return for the owners.

So when that return becomes spectacularly good for the executives, and unspectacular, or worse, for the owners, the whole purpose is betrayed. It is as if the butler of a great house took the lion’s share of the revenues from the estate while issuing to the poor old earl, who owns it, a little pocket-money. Indeed, it is much worse than that, because we are talking not about one moth-eaten creation of P G Wodehouse, but about the savings of millions.

We have been here before, in a different form. Thirty years ago, there was a huge problem in this country about labour relations. It was not, despite what some said, a problem about trade unions: it is a good thing that workers should have representative bodies if they want them. The problem was about trade union leaders – their power, their unaccountability and their political control. Reform had always gone wrong when it attacked unions per se. It started to go right when, under gradual changes introduced by the Thatcher government, it took unions away from their leaders and returned them to their members. It insisted on secret ballots before strikes and to elect officers; it removed special immunities. The struggle was about ownership. Eventually, the members owned the unions once more. Industrial relations returned to sanity.

The Left did badly in that conflict. For sentimental and self-interested reasons, too many Labour politicians had failed to face the fact that their ideal of social solidarity had been hijacked by the union bosses and militants. As a result, they suffered politically, and they deserved to.

Today, the rise of the modern, super-size executive presents the Right with a comparable challenge. For too long, the defenders of capitalism, and especially the Conservatives, have tended to defend high pay at the top uncritically. They have shared the delusion, widespread among the people who receive such sums, that anyone who earns £4.8 million a year (the current average for the chief executives of FTSE 100 companies) must be pretty good at his job. Mouthing mantras about the virtues of the market, they have not noticed when markets are being rigged.

The hired hands have tried to convince the world that, without them, business cannot succeed. In their opinion, they are the star football players without whom no goals can be scored. Like those football players, they often lack loyalty to one club, and they like to be in the transfer market. So, for them, the money they get is the overridingly important index of success. Unlike great footballers, however, these top executives are not very visible to the public, so it can be hard to work out just how badly they are playing. When it is suggested that they should get less money because their team keeps losing matches, they look very hurt, and issue terrible warnings about what would happen if they weren’t there.

Until recently, these warnings frightened people. They frightened public officials and politicians of all parties because, in an age where the CV is more important than a job well done, such people knew that big businesses and banks could give them useful opportunities when they left their current roles. They frightened small investors, who felt powerless. And they frightened fund managers, who let themselves be bullied into thinking that protest would make them part of an eccentric and isolated minority.

Now this is really changing. When executives threaten to go abroad unless they get more money, shareholders, unimpressed by their performance, invite them to do just that. When entire companies, such as Barclays, suggest that they might have to locate out of Britain, people ask how many other countries would welcome a company which may have £16 billion of unrecognised liabilities. When the heads of very large firms hymn their own virtues, critics point out that the FTSE 250 index has done more than twice as well since its creation as the big boys’ FTSE 100. It will be extremely surprising if, because of the recent reverses for top executives at Aviva, Astra Zeneca, WPP, Trinity Mirror etc, the performance of these companies now declines. Many of these multi-millionaires will turn out to have contributed no more to the general good than all those trade union bosses called Ron and Len and Moss who infested our television screens in the late Seventies.

It feels unlikely, I am glad to say, that the new “Shareholder Spring” will be washed away in the current dismal weather. Britain is ahead of the game compared with America, where these problems are even greater. The last government legislated for annual remuneration reports. The present Coalition this week won the second reading of the Enterprise and Regulatory Reform Bill, which makes shareholder votes on executive pay binding. More important still, there is a cultural change. People talk of a “bottom-up revolt of fund managers”. Companies such as Investec Asset Management now make their decisions on executive pay votes at AGMs a central part of their activity. The owners are starting to realise that they have the power, if only they dare to use it.

And that is exactly how reform should work, because one of the virtues of ownership is that it enables people to exercise their own rights without government taking control. But there is still a big risk that all the wrong political conclusions will be drawn. Fat cats = capitalism. High taxes = fairness. Nationalisation = social benefit. Ed Miliband is well placed to argue all these false things; and the Tories, still so distant from the small trader, the entrepreneur and the new business, and still too close to the corporate giants, have a vast amount of ground to make up.