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Matthew Lynn's London Eye Archives | Email alerts
May 9, 2012, 12:01 a.m. EDT
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By Matthew Lynn
LONDON (MarketWatch) "” The weapons might be proxy forms rather than Molotov cocktails, and the rebellions might be staged in hotel conference rooms rather than on the streets. But there is still a whiff of insurrection in the air.
After a decade during which executive pay soared higher and higher, the patience of the people who actually own the world's largest companies "” the shareholders "” looks finally to have snapped.
The Davos set "” the people who run the companies in the FTSE, the DAX or the S&P500 "” are seeing huge protest votes against their lavish pay packages. A few have even been forced to step down, and it is a fair bet that many more will follow.
That is going to have a big impact on the markets "” and in time on the economy as well. Like how? It will lead to an increase in dividends, a higher rate of investment, and may well lead to stronger stock market returns. There aren't many reasons to feel positive about equities right now, but the rebellion against outrageous executive pay is one of them.
It has been impossible to miss the series of revolts over CEO pay. On Tuesday, the boss of the giant British insurer Aviva resigned after losing a shareholder vote on his pay package. At Barclays last month, Bob Diamond saw a quarter of his shareholders vote against his compensation package. At easyJet, the founder of the airline, Sir Stelios Haji-Ioannou, has been leading a campaign against the payments made to the current executives. Sly Bailey of the British newspaper chain Trinity Mirror has faced intense criticism over the size of her pay at the ailing newspaper group and ended up resigning.
Nor is it just restricted to the U.K. In the U.S., shareholders defeated the proposed $15 million pay package for Citigroup boss Vikram Pandit. And in Switzerland "” hardly a place anyone thinks of as a hotbed of radicalism "” a third of shareholders voted against the pay packages proposed for Credit Suisse's top executives.
British insurance group Aviva PLC said Tuesday that Chief Executive Officer Andrew Moss would stand down with immediate effect, the latest CEO to leave amid investor anger over pay. Heard on the Street's Andrew Peaple reports. Photo: Reuters
Now a whole series of global multinationals face potential pay rebellions, including the consumer goods giant Unilever, and the advertising conglomerate WPP. There are no guillotines in evidence yet, but it is certain more heads will roll as the rebellions pick up momentum. One revolt might be chance, and two a coincidence. More looks like the start of a trend.
There is plenty for shareholders to be upset about. Executive pay has become a racket, where the bosses of quoted companies constantly award themselves more and more money while the shareholders see little increase in the value of their stock.
Take the U.K. for example. If you look at the whole decade from 2000-2010, the pay of the chief executives of the 350 largest quoted companies went up by 108%, according to a recent study by the consultants IDS. And the value of those companies over the same period? It went up by just 8%. So the executives were rewarded 10 times more than the shareholders.
At the top of the scale, the problem is even worse. In the FTSE companies, bosses now routinely earn several million a year in pay and bonuses. A decade ago, a million pound pay package was still enough to make headlines. And yet over the whole of that decade the FTSE has gone precisely nowhere. The index is worth less today than it was in 1999. So while the bosses made millions, the people they are supposedly working for made nothing.
Much the same is true in most other countries. The returns to being a CEO have soared, while the returns to being a shareholder have stagnated. In real terms, they have actually got poorer. That is hardly fair for the people who actually own these businesses.
The interesting question is what this means for the way the markets work "” and in turn how the economy works.
The big decisions on where to invest and how much are all made by a small group of people. And "” obviously enough "” they are largely influenced by what is in their financial self-interest.
If the protests gather steam, we can expect three big changes.
First, CEOs are going to pay a lot more attention to their shareholders. In the last decade, they paid a lot of lip-service to serving shareholders but there was no substance to it. They could treat them with contempt and assume it didn't matter. After all, they never actually did anything. Now that has changed and shareholders will have to be taken a lot more seriously. In the first instance that means higher dividend payouts because that is the one way to keep the equity markets happy.
Two, it means more investment. For most of the last decade, big companies have been channeling money into stock buybacks and other devices for inflating the value of their share options. In a world of stockholder rebellions, CEOs will be paid far more modestly and will only be rewarded for genuinely improving the business they are running. In effect, that means they will have to focus more on slowly and patiently building market share, and you can only do that through investment.
Lastly, we may well see higher stock markets. It can hardly be a coincidence that as CEO pay has soared, stocks have stagnated. Companies became vehicles for enriching their senior staff rather than their investors "” with banks as the most extreme example, but with many others guilty of precisely the same thing.
If pay comes under control, and the focus is on shareholders again, equity markets may start to recover. If so, that will increase wealth across the board. Investors will feel richer, and pension funds will look in better shape. That will help to boost those developed economies where demand has been flagging.
Globally, the markets face a storm of trouble "” debt levels are too high, the euro is disintegrating, and aging populations slow down growth. But ending the CEO pay racket, and focusing big companies back on investment and rewarding their shareholders, is a positive sign.
Perhaps the coming decade won't be as bad for the markets as the last one.
Matthew Lynn is chief executive of Strategy Economics, a London-based consultancy. His latest book, "?The Long Depression: The Slump of 2008 to 2031,' is published by Endeavour Press.
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