Shareholders ‘should have bigger say on excessive pay’

Major shareholders should be given a bigger say in appointments to company boards, the shadow business secretary said today, claiming excessive pay and “rewards for failure” were signs of what is wrong with the economy.

Chuka Umunna urged an end to the “old way of doing business” on massive pay deals, including the inflation of salaries by remuneration consultants.

“Excessive pay and rewards for failure are symptomatic of what is wrong with the way our economy has been operating over the last 30 years - of how wealth is created, how opportunities are shared, how success is rewarded, and how power is exercised in our companies,” he said in a speech to the High Pay Commission and the Institute for Public Policy Research (IPPR).

His suggestions included putting the four or five biggest shareholders in a company in charge of finding people to serve on its board.

The process is usually in the hands of other board members, sitting on the nomination committee.

But Mr Umunna said the nomination committee should feature major shareholders rather than board members and also have responsibility for overall remuneration levels.

“This would create far stronger lines of accountability to those who ultimately own the business and would promote the shareholder activism and engagement which is key,” he said.

Mr Umunna also criticised the make-up of remuneration committees comprising members “mostly from a narrow class of, mostly male, current or former executives”.

“The voice of employees is silent and shareholders vote in an advisory capacity on remuneration reports after the event,” he said.

“You don’t need to be a rocket scientist to detect a problem with this old way of doing business.”

And he called for closer scrutiny of remuneration consultants amid concerns that they are “ratcheting up pay” in a way he likened to “unscrupulous football players’ agents - inflating salaries sometimes way beyond talent or contribution”.

“Part of the problem is that - in their advisory role to remuneration committees - the consultants owe their duties to the board and not to the shareholders,” he said.

“This needs to be looked at, along with the risk of conflict where consultants are advising both executive management and non-executive directors on remuneration.

“That is why it is right that companies should publish the extent of their use of remuneration consultants.”

Mr Umunna said that a small group of executives are paid “far in excess of what they deserve” and endorsed recommendations by the High Pay Commission to simplify pay packages, publish those of the 10 most highly-paid employees outside the boardroom and reveal the ratio between the best remuneration deals and the median average.

But he said there were “a number of problems” with Prime Minister David Cameron’s plan to allow shareholders to veto pay packages.

The proposal was “backward-looking” and would create legal problems in trying unpick deals already agreed, he argued.

“It is not enough for David Cameron to say he wants shareholders to be given a vote on these issues,” he said.

“We have seen and heard this kind of thing from him before - talking a good game but fiddling at the margins.

“I believe in shareholders’ democracy, but democracy is about more than voting. If we are to empower shareholders, they need information provided through greater transparency of boardroom pay - as well as the means to mobilise and become more active in the running of their companies.”