Swiss aim to tackle high pay through shareholder democracy

You scratch my back, I'll ask the shareholder remuneration committee to vote to scratch yours.

Switzerland has followed the EU and implemented laws designed to curb high pay. But whereas the EU implemented a hard cap which only affected bonuses in the banking industry, the Swiss plan is both more wide-ranging and less heavy-handed in how it operates.

The key change is a requirement that companies give shareholders a binding vote on executive pay. Currently, pay is set by companies' boards, but now that the Swiss people have spoken, in a referendum which achieved a 68 per cent "yes" vote, one of the highest in the country's history, that is going to change.

The move will fight the so-called principal-agent problem, which is common throughout business and politics. In theory, shareholders entrust the board to make the right decisions on executive pay; if higher pay will lead to more value for the shareholders, perhaps by encouraging the best candidates, then the board should support it, but in most situations, the board should endeavour to keep costs down. Unfortunately, while the board members are entrusted by the shareholders to act in their interests, board members also have their own interests — which may conflict.

In this situation, the classic conflict is that a board member for one company may well be an executive for another, and vice versa. They end up in the situation where they are making decisions about the pay of people who make decisions about their pay, and it's not hard to see how that could result in pay going through the roof.

But handing control over to shareholders doesn't remove all principal agent problems. It all depends how institutional shareholders decide to act — and there's reason to believe they may not be much better. If you invest in a pension fund, you technically own several companies. But the right to vote on how those companies are run — and now, in Switzerland, on how much those companies' executives are paid — is held by the pension fund.

Such funds tend to be uncomfortable about exercising too much shareholder democracy. Partly, this is because they fall prey to the same problem that boards do: the executives who decide how to vote have their pay set by other executives voting on remuneration committees, and the whole backscratching saga continues only slightly abated.

But it is also a matter of privilege and viewpoints. Even if there is no chance of reciprocity, a highly paid financial executive is likely to have very different views on the appropriate level of pay for other highly paid financial executives compared to you or I. For shareholder democracy to really deal with high pay in the boardroom, it would need either a massive resurgence in private investors (not the best idea, since that would likely also result in a huge upswing in private investors losing all their money in the stock market) or institutional investors devolving much more say to their members.

The other requirements set by the Swiss referendum are likely to have more direct effects. In requiring annual re-elections for directors, they remove much of the inertia that can keep people in these extremely well-remunerated, largely ceremonial positions for years beyond their time. And in explicitly banning "golden hellos" and "goodbyes", the practice of awarding a large lump sum upon joining or leaving a company, they create a much more stable and manageable system of pay for the shareholders to oversee.

But fundamentally, tackling high pay — and by extension, inequality — requires tackling the fact that the rich choose how much to pay the rich. The best proposal to do that is something similar to the suggestion that employees ought to have a place on the company's remuneration committee. After all, they have just as much interest in the company being run well, because their jobs depend on it. But they also bring a viewpoint which is sorely lacking in these discussions, whether they are being held in Switzerland or Britain.

The city of Montreux, Switzerland. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Politicians: it's no longer OK to know nothing about technology

It’s bad enough to joke about not being "techy"; it's worse to write a piece of legislation from a position of ignorance. 

Earlier this week, facing down a 600-strong battalion of London’s tech sector at a mayoral hustings in Stratford, Zac Goldsmith opened his five minute pitch with his characteristic charm. “I’m not very techy!” he exclaimed. “I understand coding about as well as Swahili!”

Pointless jibe at a foreign language aside, this was an ill-chosen way to begin his address - especially considering that the rest of his speech showed he was reasonably well-briefed on the problems facing the sector, and the solutions (including improving broadband speeds and devolving skills budgets) which could help.

But the offhand reference to his own ignorance, and the implication that it would be seen as attractive by this particular audience, implies that Goldsmith, and other politicians like him, haven’t moved on since the 90s. The comment seemed designed to say: “Oh, I don't know about that - I'll leave it to the geeks like you!"

This is bad enough from a mayoral hopeful.  But on the same day, the Intelligence and Security Committee of Parliament filed its report on the Draft Investigatory Powers Bill, the legislation drafted by the Home Office which will define how and how far the government and secret services can pry into our digital communications. Throughout, there's the sense that the ISC doesn't think the MPs behind the bill had a firm grasp on the issues at hand. Words like "inconsistent" and "lacking in clarity" pop up again and again. In one section, the authors note:

"While the issues under consideration are undoubtedly complex, we are nevertheless concerned that thus far the Government has missed the opportunity to provide the clarity and assurance which is badly needed."

The report joins criticism from other directions, including those raised by Internet Service Providers last year, that the bill's writers didn't appear to know much about digital communications at all, much less the issues surrounding encryption of personal messages.

One good example: the bill calls for the collection of "internet connection records", the digital equivalent of phone call records, which show the domains visited by internet users but not their content. But it turns out these records don't exist in this form: the bill actually invented both the phrase and the concept. As one provider commented at the time, anyone in favour of their collection "do not understand how the Internet works". 

Politicians have a long and colourful history of taking on topics - even ministerial posts - in fields they know little to nothing about. This, in itself, is a problem. But politicians themselves are often the people extolling importance of technology, especially to the British economy - which makes their own lack of knowledge particularly grating. No politician would feel comfortable admitting a lack of knowledge, on, say, economics. I can’t imagine Goldsmith guffawing "Oh, the deficit?  That's all Greek to me!"  over dinner with Cameron. 

The mayoral candidates on stage at the DebateTech hustings this week were eager to agree that tech is London’s fastest growing industry, but could do little more than bleat the words “tech hub” with fear in their eyes that someone might ask them what exactly that meant. (A notable exception was Green candidate Sian Berry, who has actually worked for a tech start-up.) It was telling that all were particularly keen on improving internet speeds -  probably because this is something they do have day-to-day engagement with. Just don't ask them how to go about doing it.

The existence of organisations like Tech London Advocates, the industry group which co-organised the hustings, is important, and can go some way towards educating the future mayor on the issues the industry faces. But the technology and information sectors have been responsible for 30 per cent of job growth in the capital since 2009 - we can't afford to have a mayor who blanches at the mention of code. 

If we’re to believe the politicians themselves, with all their talk of coding camps and skills incubators and teaching the elderly to email, we need a political sphere where boasting that you're not "techy" isn’t cool or funny - it’s just kind of embarrassing. 

Barbara Speed is a technology and digital culture writer at the New Statesman and a staff writer at CityMetric.