Over-fed Felines
Continuing on our CEO’s-get-paid-too-much-for-just-doing-their-job or Hey-they-didn’t-start-the-company-or-take-any-risk soap boxes, On 3 March, Switzerland conducted a referendum on executive remuneration which included some of the following proposals:
- The aggregate compensation of the board of directors will be subject to shareholders’ approval on an annual basis
- Severance payments and advance payments will be prohibited
- A violation of the rules will be subject to criminal sanctions
The citizens of Switzerland overwhelmingly voted in favour of the proposal, which is an amazing achievement considering that they are reportedly the richest people in the world per capita. This demonstrates that there is a real disconnect between the performance of management and their subsequent remuneration – shareholders are no longer willing to sit back and watch it continue. With the referendum passed, it will now go to the Swiss government to draw up appropriate legislation. But this event will lead to important global implications – consider that UBS, a Swiss-based global investment bank, may have to modify their remuneration policy in Australia.
Just prior to this historic vote, the chief executive of the world’s largest miner stepped down. Marius Kloppers received a golden farewell that has been widely reported – upon leaving BHP, he is to receive approximately $75 million. To his credit, Marius did forfeit his short-term bonus last year given the disappointing performance of its shale gas acquisition in the US. But there has been no mention that he will be forgoing this final bonus, which would lead us to assume that he considers the amount is reasonable based on his overall performance. I’m not sure if shareholders would share the same view.
The reason I bring up these two events is because of the context they provide to Tim’s recent post (which was written prior to these two events, though coincidentally was published subsequently).
For those who missed it, the key message from Tim’s post is provided below:
“It seems to be that it must be all but impossible for a board of directors to be able to gauge with a high level of accuracy the true worth of a CEO, and particularly a CEO who has not been in the role for an extended period. Given this, we can probably say with confidence that a board of directors that routinely awards astronomical pay packages for CEOs who spend 4-5 years at the helm is throwing away money that rightfully belongs to shareholders.”
The role of management is to generate the greatest value for shareholders. It’s a serious responsibility, which the Swiss are recognising by enacting serious consequences for management that are unduly rewarded. I encourage you to read Tim’s post, and contribute to the discussion about management remuneration in Australia.
Read Tim’s post here.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
Steve Baron
:
Yes Karl, income inequality is indeed a complex issue. Research shows that what works in one location may not necessarily work in another. The real issue is getting politicians to realise there is a problem and that problem will have dire consequences even for the wealthy like you and me that invest in stocks. Once they realise this they have to find a solution for their location. This video from the authors of The Spirit Level may interest readers http://www.ted.com/talks/richard_wilkinson.html
xiao fang xu
:
what is older chicken or egg???
executive remuneration are symptoms, not problem
that is what you get if you have immoral laws.
problem is fractional reserve banking, fiat money, central banking … and similar laws which produce this inequality which ultimately lead to ENVY.
inequality is good if it is natural.
Democracy–“The principle that the majority have a right to rule the minority, practically resolves all government into a mere contest between two bodies of men, as to which of them shall be masters, and which of them slaves; a contest, that — however bloody — can, in the nature of things, never be finally closed, so long as man refuses to be a slave”.
“It is bad to be oppressed by a minority, but it is worse to be oppressed by a majority”.
“Democracy must be something more than two wolves and a sheep voting on what to have for dinner”.
thanks.
ned.
Roger Montgomery
:
Nice Ned…with thanks to Gary Srand and James Bovard
Raymond Lundie
:
Possible we could look at a similar thing for Aussie politicians, since in Vic we have Mikie, desalination plant which is most probable rusting by now, Sugarloaf pipeline and billions on trains that save about 5min on country train trips. An as individuals how may have been caught with their hand in the till.
I hope these comments a not seen as poly bashing!
Steve Baron
:
Well there is one of the real advantages of direct democracy. The citizens can make changes when they are not happy with their society. Why dont Australians and New Zealanders demand such a political tool?
Greg Scott
:
I will gladly join your line of soap boxes on this topic. As I see it, executive remuneration has progressively (and fairly quickly) gotten totally out of whack with public expectations of what is a fair multiple of other hard working employees efforts. Unfortunately, the lame excuses that Boards provide to justify excessive remuneration (usually that ” everyone else is paying $X so therefore we must too”) fail to separate the trees from the forest. The point that the good citizens of Switzerland have correctly made is that the whole forest needs to be pruned.
Roger Montgomery
:
From the BBC March 3rd 2013:
Swiss voters have overwhelmingly backed proposals to impose some of the world’s strictest controls on executive pay, final referendum results show.
Nearly 68% of the voters supported plans to give shareholders a veto on compensation and ban big payouts for new and departing managers.
Business groups argued the proposals would damage Swiss competitiveness.
But analysts say ordinary Swiss are concerned about a growing economic divide in the country.
The vote came just days after the EU approved measures to cap bankers’ bonuses.
‘Fat cat initiative’
The final results showed that all 26 Swiss cantons backed the proposals.
In all, 1.6 million voters said “Yes” against 762,000, who rejected the idea.
The BBC’s Imogen Foulkes, in Berne, says multibillion dollar losses by Swiss banking giant UBS, and thousands of redundancies at pharmaceutical company Novartis, have caused anger in Switzerland – because high salaries and bonuses for managers continued unchanged.
The new measures will give Switzerland some of the world’s strictest corporate rules, our correspondent adds.
The “fat cat initiative”, as it has been called, will be written into the Swiss constitution and apply to all Swiss companies listed on Switzerland’s stock exchange.
Support for the plans – brain child of Swiss businessman turned politician Thomas Minder – has been fuelled by a series of perceived disasters for major Swiss companies, coupled with salaries and bonuses staying high.
Our correspondent says the main example is banking giant UBS, which wrote off billions in the wake of the 2007 sub-prime mortgage crisis, and then had to be bailed out by the Swiss government.
A further incident came in February when it was announced that the outgoing chairman Novartis’, Daniel Vasella, would be receiving a 72m Swiss francs (£51m; $78m) “non-compete” pay off over six years, designed to stop him working for other related industries.
The payment was later scrapped, but it provoked anger and amazement in Switzerland, because his salary had been regarded as too high and the firm had been cutting jobs, our correspondent adds.
One of the organisers of the referendum, Brigitte Moser Harder, told the BBC she thought the Swiss people agreed with the proposals because the gap between rich and poor had become wider.
“From the beginning, 2006, we had the support of the people of Switzerland because you know not everybody in Switzerland is rich.
“It’s also a social problem because the high wages got higher and the small ones sometimes just got lower. I think people have the support of the Swiss people because of that.”
Meanwhile, under an EU deal agreed last week by the bloc’s 27 nations, bonuses will be capped at a year’s salary, but can rise to two year’s pay if there is explicit approval from shareholders.
The UK argued the EU bonus rules would drive away talent and restrict growth in the financial sector.
Karl Melrose
:
There’s a great quote I heard once, it goes like this – “For every significant issue there is a resolution that is clear, simple and wrong”
Income inequality is a complex issue. The solution to it isn’t to legislate against the rights of owners to run their businesses, the issues are far more complex. People seem convinced that reducing the take home pay of the tallest poppies will somehow improve their own prospects, it wont – or not in any substantive way. Owners of businesses and their elected/selected agents should be able to invest company funds wherever necessary to improve the competitive prospects of a business, if you don’t have a big enough share holding in a business to effect changes in business asset allocation, you shouldn’t get to decide except when your opinion is part of a group of shareholders with a holding large enough to effect the change purely on the basis of voting power.
My favourite analogy in this situation is that of a car, if I don’t own it – I have no power to make decisions about it. I’m also not allowed to restrict the actions of the person who does own the car because that would be stupid. This latest piece of legislation in Switzerland is stupid – but the Swiss people can all breathe easy now that…what? Their right to control their property has been eroded? Stupid.
No shareholder in his right mind voted yes in the Swiss referendum, in effect, a shareholder voting yes was voting to diminish their own ability to run the business. It practically guarantees a shift in superb management talent from publicly traded companies to privately held ones.
Hopefully I’ll be proven wrong and this legislation will be a roaring success that will see companies pushed to greater heights by an asset allocation away from top management remuneration and into productive projects or shareholder pockets, but given that decision making in this case seems restricted to wallet size comparisons, I’m not optimistic for the future of publicly traded companies.
Take the issue of the Novartis CEO payout, based on my read of it, the board acted to ensure that it’s strategic investments for the next 5 + years were protected by removing the incentive for one of the principal architects of their strategy to compete against them. The CEO had knowledge that could cost Novartis billions in lost revenue if used by a competitor. The board obviously felt that a standard non-compete clause wasn’t going to do it and that the best course of action was to pay the CEO not to compete. The fact that public opinion may have been a factor in changing this decision is a joke – and any shareholders who didn’t support it will be well placed to lose a significant amount of money when the business competes poorly because they objected to a payment comprising 0.0004% of Novartis market cap or 0.00125% of their yearly revenue.