UK bosses play dangerous game: pay me or fire me

June 11, 2012

By Christopher Hughes 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The O-word is causing friction between UK bosses and shareholders. Martin Sorrell says he was wounded by a shareholder who said the chief executive of advertising group WPP he had been behaving “as an owner”. Ivan Glasenberg, Sorrell’s counterpart at commodity trader Glencore, has come to his aid, saying it is hard to get a CEO to be entrepreneurial if they didn’t own a lot of stock.

The disgruntled WPP shareholder gave no examples, but presumably the idea was that Sorrell was acting like an imperious owner-leader of a private enterprise, who feels free to ignore the standards of public company life. In an article for the Financial Times, Sorrell countered that with most of his wealth tied up in WPP stock, he acts as an owner in the best possible way. Glasenberg claims that stock ownership is integral to entrepreneurial motivation.

But a boss with a small share of the equity, even if his or her personal wealth is mostly tied into the company, is in a different position from a chief executive who controls a majority of the company’s voting stock. Boards of directors may like the loyalty and commitment shown by big equity positions. That, however, shouldn’t give the chief executive the right to behave like an outright owner.

Sorrell and Glasenberg were instrumental in building their respective firms. Both decided they needed to access the public equity markets to fulfil their ambitions. The decision to go public makes them no more than co-owners. The other shareholders can take comfort that the boss shares their fortunes – but only if the chief executive actually acts like a co-owner rather than an outright owner. That means engaging constructively with fellow shareholders, not getting into massive bust-ups over remuneration.

Glasenberg said that a vote against the board’s recommended pay package for the CEO is a vote against the CEO. Not so – it’s a vote against the board’s judgment. But a boss who said “pay me this package or fire me” would not be acting like a responsible owner. It would be holding fellow shareholders to ransom.

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I have worked both in industry and in brokerage, so understand both sides of the argument.

Wearing my industry hat, I would say that shareholders are just that, holders of shares. They are not owners and are not in it for the long term, but instead are there merely for as long as it takes to get a return. A reality.

Should this short-term oriented group – the majority of which have never and will never run a business – therefore control the remuneration of a CEO that has been there since the start and will probably be there until his end?

In a real sense, the only right a shareholder has is to buy or sell his shares, to vote with his feet.

Let us also not forget that the issue in question, the CEO’s remuneration, is unlikely to have a significant effect per se on the share price, which is the NPV of all future cash flows. This is therefore not really an issue of shareholder value.

However, shareholders do have an influence and, as you say, a decision was taken to go public and so to expose oneself to that environment.

Management may think that it is unfair that investors have a say over such things. In the end, however, it is management’s responsibility to communicate effectively with the investment community, and in a way that shows that the company takes shareholders seriously – not because the poor chaps might feel that they are being held for ransom, but because that is how the system works, for good or bad. Also, therefore, a reality.

(Oh dear, I have probably alienated both sides now!)

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