Soaring rewards at the top are shocking but hardly surprising

This is a slightly edited version of a blog I wrote for work over at Any Other Business. There's more I could say on this subject, but for FairPensions' sake I try and keep a reasonably clear line between work and personal blogging, so I've left it pretty much as it is.

Last week it was revealed that the pay of FTSE 100 executives rose by almost 50% last year. The overwhelming impression for me was one of deja vu: last October saw a parallel media storm after the same research company announced that CEOs' pay had risen by 55% over the previous year. (This year's study referred to all boardroom pay, not just that of the CEO, whose pay this year rose by a mere 43%.)

Shocking? Yes. Surprising? Not really. Deborah Hargreaves of the High Pay Commission hit the nail on the head when she spoke about a 'closed shop' that needs to be broken open. A lot has been made of the idea of employee representation on remuneration committees as a potential brake on high pay. But at least as important as who should be on these committees is the question of who shouldn't be on them.

At the moment, cross-pollination among Britain's corporate elite means that theoretically 'independent' directors are often deciding on pay for people who, in turn, are responsible for setting their own pay. Hardly surprising, then, that they all continue to conclude that they're excellent chaps deserving of the most generous rewards. That's why, in the government's forthcoming consultation on executive pay, FairPensions will be arguing strongly for more robust measures to prevent conflicts of interest. Of course, it's not the only issue here, but it's an obvious place to start.

The real puzzle, then, is not why these committees keep ramping up top pay, but why shareholders - including those who look after our pensions and other savings - continue to overwhelmingly endorse them. An interesting snippet from the BBC report of last year's findings on CEO pay is that the researchers thought:

'shareholders were likely to be annoyed by what it called the "business as usual" approach to executive pay, after only a short period of restraint during the economic downturn'.

I say 'interesting' because, eminently reasonable though it might sound, sadly that assessment isn't going to be winning any awards for Year's Best Prediction. At this year's AGM season, when - as we've just discovered - pay packages soared out of all proportion to shareholder returns for the second year in a row, the reaction of investors didn't register much above 'mildly peeved'. Yes, there was noticeably more noise around executive pay than in previous years. But, for all that, not one FTSE 100 remuneration report was rejected by shareholders in their advisory vote.

[Edit: Since I wrote this, a newly released piece of research hints at why this might not be quite such a perplexing puzzle after all: asset managers' own pay rose by 18% last year, apparently due to "pressures to attract and retain talent" - exactly the same dubious justification that's usually trotted out for phone-number salaries at chief executive level. Indeed, some of the companies which faced significant opposition to their executive pay packages at this year's AGMs were themselves investment firms.]

The government is currently considering whether to strengthen shareholders' powers to veto remuneration packages. FairPensions has always argued that, if shareholder oversight is to have any meaning, shareholders need the tools to hold boards to account. But, crucially, they also need the will to use them. Perhaps ultimately it will fall to us, the individuals whose money is at stake, to strengthen their arm.

Time to break the habit?

Apologies for prolonged failure to blog; it's summer and I've been busy carrying a cello around Edinburgh. Anyway, work have once again kindly agreed to let me cross-post this blog I just wrote for them over at Any Other Business to tide you over. Usual disclaimer - No Wealth But Life represents my personal views only and has no formal affiliation with my employer, etc.

Kent County Council has become the latest local authority to come under fire for its investments in tobacco. Why it has been singled out is something of a mystery - as last year's Evening Standard investigation into London boroughs' investments showed, councils who don't invest in tobacco are the exception rather than the rule. But Kent's response is a perfect illustration of a seductive habit - one that may be comforting to investors under pressure, but is less than helpful to those around them.

Faced with media criticism of the pension fund's tobacco holdings, Kent's spokesperson did what investors in their position seem to have done since time immemorial: they fell back on the well-worn mantra, "We have a responsibility to obtain the best possible return on investments."

It’s standard practice for funds, when questioned about the ethics of a particular investment, to respond that their hands are tied by their duty to maximise return. But where does this duty come from? As part of the research for our recent report, I was lucky enough to trawl through pretty much every major court case on investors’ legal duties. I looked long and hard for the oft-invoked ‘duty to maximise return’, and I can confirm that the phrase doesn’t appear anywhere.

This isn’t to say that there’s no basis at all for this view: there is, as they say, no smoke without fire. What the law does say is that pension funds have a duty to act in the best interests of their beneficiaries, and that this will usually mean their best financial interests. But does that rule out disinvestment from particular companies on ethical grounds? Not necessarily.

There is nothing in law that bars pension funds from considering their members’ ethical views. Of course, it would be unfair for them to accommodate the views of a minority if this would result in a serious loss of income for the majority who don’t care. If excluding an investment was really going to damage returns, you’d have to be able to show a pretty watertight consensus among your beneficiaries that the investment was wrong. In the case of tobacco, this might be unlikely.

But what if an investment could be excluded without damaging returns? Lots of funds exclude investments on this basis: if you can show reasonable grounds for thinking an exclusion won’t make any significant impact – for example, because you can substitute another stock which behaves in a similar way – it should be permissible by law. In the case of tobacco, some campaigners have even argued that it makes positive financial sense to exclude it, because litigation and increasing regulation mean the tobacco industry does not have a long-term future. That’s also the view taken by Newham Borough Council, whose pension fund excludes direct investments in tobacco firms.

Of course, not every given exclusion will pass this test. But the important thing is that the test should be applied: if lots of members are unhappy with a particular investment, the fund should examine whether that concern could be addressed without harming the other members’ interest in a decent pension. Instead, too many funds fall back on the easy response of claiming there’s nothing they can do.

So if your pension fund invokes the ‘duty to maximise returns’ to justify an investment you think is unethical, ask them what analysis they’ve done of the impact of excluding that stock. If the answer is ‘none’, challenge them to explain why. They might not thank you for it, but it’s in everyone’s interest to help them break the habit.

He's got a whole field of ponies and they're all literally running away from his taxes

Today, one of my many news-digest mailing lists informed me that

"Peter Hargreaves has soared 46 places on The Sunday Times Rich List, placing him ahead of musical maestro Andrew Lloyd Webber, Lord Alan Sugar and Easyjet's Sir Stelios Haji-Ionannu."

Peter Hargreaves, I thought. Why does that name ring a bell? Oh yes, it's because back in February, I posted an immoderate rant about an article he wrote which suggested that the government wasn't nearly serious enough about cutting spending and that, if you were filthy rich, the only morally responsible thing left for you to do was furiously avoid paying your taxes.

Peter Hargreaves is now the 65th richest person in the United Kingdom. Peter Hargreaves is a billionaire. Peter Hargreaves' tax bill is probably within the same order of magnitude as the cost of some of the vital public services people are battling to save - my local library, for example. Basically, the amount of tax Peter Hargreaves pays has a not-entirely-negligible impact on the deficit.

Peter Hargreaves does not believe the deficit isn't an issue. On the contrary, he believes it's an enormous issue. Clearly, for every billionaire who pays less tax, the government has a bigger gap to plug, which means harsher spending cuts. So by endorsing tax avoidance, Peter Hargreaves is effectively saying he thinks that money is much better off stashed in his bank account than paying for services for the poor and vulnerable. Not only that, he presumes to moralise on the matter. Is it just me, or is that utterly grotesque?

(Incidentally, Stephen Lansdown, Hargreaves' partner at Hargreaves Lansdown brokers, comes in at a mere number 90 on the rich list, with a piffling £750m personal fortune. Amateur.)

Oh God, won't somebody please think of the rich?

A major downside of having bought a single share in BP for work purposes last year is that my brokers, Hargreaves Lansdown (it feels so wrong even typing that phrase) now keep on sending me crap. I am pretty sure they have now sent me crap to more than the value of the share (which was about a fiver, if anyone's interested). Moreover, said crap has a tendency to add to my levels of outrage more than I think is really healthy at this troubled time.

This month's edition of 'Investment Times' arrived on Sunday, and I didn't even have to remove it from its plastic wrapping to find something objectionable. On the front cover is an article by Mr Hargreaves with the headline "Who will bear the burden?" As you might imagine, the "burden" in question is that of reducing the deficit. And the answer to the rhetorical question appears to be "Not the rich, anyone but the rich!"

The article starts off by expressing concern that "neither the government, nor the public, exhibit the stomach for cuts in public expenditure". You can pretty much guess what's coming from the fact that this guy's biggest concern about the Tories is that they're just not keen enough on cutting things.

Next, he moves on to Labour and "the unions" - accusing them of "misinformation" designed to disguise the scale of the national debt. Surely, Mr Hargreaves concludes, "the general consensus is that we should be reducing our public debt as soon as possible."

Then, in a leap of logic I'm still struggling to fathom, he starts opining about how hard done by the rich are in today's society: apparently, "Britain has a perverse attitude towards wealth and success", reflected in the fact that "even right-wing politicians are suggesting that people with money and savings are the easy option to effect the bailout." I'm not quite sure what he means by "the bailout" in this context - I assume he's talking about the deficit again. He seems a little confused, poor man.

Anyway. Onwards and upwards: "There is no account taken of their prudence, their work ethic and the tax they paid accumulating those savings." Hmm. That would be the kind of "prudence" displayed by the millionaires who brought the financial system crashing down on all our heads? I see. Well, it sure is a mystery why nobody's taking that into account.

"Sadly" - oh so sad! I am practically weeping as I type this - "the only thing that people with savings can do is place as much of them as possible out of the taxman's clutches, for it is through taxes that wealth will be used to balance the books."

Ah, so now we get to the point. It turns out this whole article has been a rambling, incoherent intellectual justification for tax avoidance. And sure enough, when you look inside (as I have just done after finally bringing myself to tear off the plastic wrap) it turns out that the lead features in 'Investment Times' are all about how Hargreaves Lansdown is the discerning choice for all your tax-dodging needs. There's even another little vignette inside, where Mr Hargreaves complains that "[the government's] first port of call is those with the broadest shoulders" (really? I want to live in Mr Hargreaves' world please), and reiterates that "placing as much capital as you can into tax shelters is therefore vital." Well, Mr Hargreaves, why didn't you just say so in the first place? Really you could have just printed a picture of yourself sitting on a sack of money sticking two fingers up at the nation and saved us all some time.

Frankly, I am struggling to get inside the mind of someone who genuinely believes that the government is somehow more enthusiastic about taxing the rich than it is about cutting poor people's benefits. But leaving that aside for the moment, it seems to me that the rest of this article can be briefly summed up as follows:

1. It is very, very important that we reduce the national debt. Stupid lefties do not understand this.
2. It is therefore very, very important that rich people pay as little tax as possible on our enormous quantities of wealth.
3. Why? Um, because we're awesome.

Sorry Mr Hargreaves, but with shoddy arguments like that, you're not doing any favours to your claim that you deserve your millions for being so thoroughly brilliant.