Hester gives up £1m share award
After almost a week of media and political scrutiny, RBS chief executive Stephen Hester has decided to waive a share award worth just shy of £1m. Whilst the public row has been defused, this raises some interesting issues for the corporate governance community.
It seems that Hester’s decision resulted from backdoor negotiating combined with the threat from opposition leader Ed Miliband MP to hold a parliamentary vote on the award. After a week suggesting variously that it was contractually obliged to make the award, didn’t have the power to block it, or that to do so would damage the bank, it appears that the Government felt it could not risk appearing to be out of control and put some pressure on.
Whilst Hester’s decision is likely to be seen as the right one in the court of public opinion, for many in the corporate governance world the award was not unreasonable. The argument goes that this was part of the deal when Hester joined, and that he is still turning the ship around. What’s more, to not make the award would be taking a big risk, lest the talent decamp. Finally, this was a share award, meaning that ‘alignment of interests’ is achieved. In purely governance terms some would say it is ‘fair.’ In fact, many people in the governance world appear perplexed, if not downright annoyed, by the row about the award, and consider that Hester’s decision not to take it is a sign of political meddling.
So, there are two competing notions of ‘fairness.’ What is acceptable in the boardroom is increasingly unacceptable, it seems, to the public. The tension between corporate and public notions of fairness is felt most keenly at RBS because the taxpayer owns most of the bank. But there is a wider disconnect between public views on pay and those of people who make decisions on it. Many in the City, including those who cast shareholder votes, would consider that the public is misinformed, naïve or just plain ‘wrong’ about cases like RBS.
This disconnect is exacerbated by the conflation of corporate governance reform with action on ‘unfairness’ in economic rewards. They are not the same thing. It is striking that of all the arguments the Government advanced before putting pressure on Hester to waive his award, citing governance norms was not one of them. This appears to be because the Government recognised that a public, rather than corporate, conception of ‘fairness’ was likely to dominate in this case. But what happens at other companies? The proposals floated recently by Vince Cable certainly have much merit, and should facilitate greater shareholder engagement if enacted. They are also likely to result in some of the worst pay policies being stopped by shareholders. But they are unlikely to reduce the pay gap, and will not deliver ‘fair’ outcomes as far as the public is concerned because most people casting most of the shareholder votes do not believe that high PLC pay is necessarily a problem in itself.
None of this would matter ordinarily, but the recent political debate about ‘responsible capitalism’ has suggested significant change in corporate behaviour. This sets expectations high. But governance reforms are likely only to address a corporate conception of fairness, for example by helping eliminate ‘rewards for failure,’ which all parties agree is unacceptable. They will not address an apparent public desire for lower awards at the top.
This is potentially problematic for institutional shareholders. The Government is setting them up as the countervailing force to address excess at the top. If executive rewards continue to rise in a way that the public regard as ‘unfair’ they could end up criticised for failing to block them. You have been warned.
