The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.
In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy. Alan MacDougall, PIRC’s managing director, said:
Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.
PIRC also calls for the UK Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote. According to MacDougall.
There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.
To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.
PIRC is the largest independent European provider of corporate governance, proxy voting and corporate social responsibility investment research and advisory services. Their clients include pension funds and fund managers with combined assets of over £1.5 trillion.
In books such as Going To Extremes and Why Societies Need Dissent, Cass Sunstein has explored group decision-making. His research into decisions made by US judicial panels with political appointees found that if the panel is made up solely of Democrats they take more ‘liberal’ stances on issues than their individual views would predict, and Republicans shift to a harder conservative position. PIRC believes that a similar process may occur where remuneration committees are comprised of individuals who share the same views on high pay.
Shareowners and/or employees on compensation committees could reduce the likelihood of group think. US firms and shareowners should consider similar options. ISS, CalPERS, John Chevedden and others please take note.