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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The NS leader: Cold Britannia

Twenty years after the election of New Labour, for the left, it seems, things can only get worse. 

Twenty years after the election of New Labour, for the left, it seems, things can only get worse. The polls suggest a series of grim election defeats across Britain: Labour is 10 points behind the Conservatives even in Wales, putting Theresa May’s party on course to win a majority of seats there for the first time in a century. Meanwhile, in Scotland, the psephologist John Curtice expects the resurgent Tories, under the “centrist” leadership of Ruth Davidson, to gain seats while Labour struggles to cling on to its single MP.

Where did it all go wrong? In this week’s cover essay, beginning on page 26, John Harris traces the roots of Labour’s present troubles back to the scene of one of its greatest triumphs, on 1 May 1997, when it returned 418 MPs to the Commons and ended 18 years of Conservative rule. “Most pop-culture waves turn out to have been the advance party for a new mutation of capitalism, and so it proved with this one,” Mr Harris, one of the contributors to our New Times series, writes. “If Cool Britannia boiled down to anything, it was the birth of a London that by the early Noughties was becoming stupidly expensive and far too full of itself.”

Jump forward two decades and London is indeed now far too dominant in the British economy, sucking in a disproportionate number of graduates and immigrants and then expecting them to pay £4 for a milky coffee and £636,777 for an average house. Tackling the resentment caused by London’s dominance must be an urgent project for the Labour Party. It is one that Mr Corbyn and his key allies, John McDonnell, Emily Thornberry and Diane Abbott, are not well placed to do (all four are ultra-liberals who represent
London constituencies).

Labour must also find a happy relationship with patriotism, which lies beneath many of the other gripes made against Mr Corbyn: his discomfort with the institutions of the British state, his peacenik tendencies, his dislike of Nato and military alliances, his natural inclination towards transnational or foreign liberation movements, rather than seeking to evolve a popular national politics.

New Labour certainly knew how to wave the flag, even if the results made many on the left uncomfortable: on page 33, we republish our Leader from 2 May 1997, which complained about the “bulldog imagery” of Labour’s election campaign. Yet those heady weeks that followed Labour’s landslide victory were a time of optimism and renewal, when it was possible for people on the left to feel proud of their country and to celebrate its achievements, rather than just apologise for its mistakes. Today, Labour has become too reliant on misty invocations of the NHS to demonstrate that it likes or even understands the country it seeks to govern. A new patriotism, distinct from nationalism, is vital to any Labour revival.

That Tony Blair and his government have many detractors hardly needs to be said. The mistakes were grave: the catastrophic invasion of Iraq, a lax attitude to regulating the financial sector, a too-eager embrace of free-market globalisation, and the failure to impose transitional controls on immigration when eastern European states joined the EU. All contributed to the anger and disillusionment that led to the election as Labour leader of first the hapless Ed Miliband and then Jeremy Corbyn, a long-time rebel backbencher.

However, 20 years after the victory of the New Labour government, we should also acknowledge its successes, not least the minimum wage, education reform, Sure Start, a huge fall in pensioner poverty and investment in public services. Things did get better. They can do so again.

The far right halted

For once, the polls were correct. On 23 April, the centrist Emmanuel Macron triumphed in the first round of the French election with 24 per cent of the vote. The Front National’s Marine Le Pen came second with 21.3 per cent in an election in which the two main parties were routed. The two candidates will now face off on 7 May, and with the mainstream candidates of both left and right falling in behind Mr Macron, he will surely be France’s next president.

“There’s a clear distinction to be made between a political adversary and an enemy of the republic,” said Benoît Hamon, the candidate of the governing Parti Socialiste, who had strongly criticised Mr Macron during the campaign. “This is deadly serious now.” He is correct. Mr Macron may be a centrist rather than of the left but he is a democratic politician. Ms Le Pen is a borderline fascist and a victory for her would herald a dark future not just for France but for all of Europe. It is to Donald Trump’s deep shame that he appeared to endorse her on the eve of the vote.

This article first appeared in the 27 April 2017 issue of the New Statesman, Cool Britannia 20 Years On

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