Let's turn the shareholder spring into a glorious summer
This is a golden opportunity to democratise the city and turn the economy into a force for social good
The Observer - Published - 13/05/2012
Protesters dressed as suited eagles on Barclays cycle hire bikes demonstrate outside the bank's AGM last month. Photograph: Oli Scarff/Getty Images
Reaction to the shareholder revolt over Bob Diamond’s £17.7m payout has been split into two main camps. The proportion of shareholders voting against Diamond's bonus was either a whopping 26%, heralding a new era of shareholder activism – or it was a derisory 26%, demonstrating the folly of relying on shareholders to rein in excessive pay. This reflects more general attitudes to the so-called "shareholder spring": depending on your point of view, it's either a flash in the pan or a sign of the times.
But there's a third response to the events of the past fortnight, and it starts with asking why shareholders have chosen this year to rediscover their spines. Over the past decade, while executive pay has quadrupled, average levels of shareholder dissent have been stuck at about 9%, with outright defeat remaining a freak event. Even in 2009, when the financial crisis saw the value of FTSE 100 companies nosedive, only two remuneration reports were voted down. Barely a month into this year's AGM season, Aviva and Pendragon have already suffered the same fate. So what's changed?
The obvious answer is that shareholders have found themselves in the spotlight. As public anger about high pay refuses to abate, and government places the responsibility for doing something about it firmly on investors' shoulders, voting decisions are under scrutiny like never before. Perhaps the real lesson of the shareholder spring is that institutional investors behave like quantum particles: differently when observed.
Many on the left point to the dominance of institutional investors in the City as a reason to be sceptical of shareholder power. True, the proportion of stock owned by individuals has plummeted over the last 40 years, but these anonymous institutions are, among others, the pension funds and insurance companies who look after our retirement savings. In other words, the owners of corporate
It is not immediately obvious, then, why today's big shareholders should have less interest in reining in corporate excess than the wealthy individual owners of yesteryear. Indeed, the rise of pension funds as a major economic force was accompanied by optimistic predictions about "citizen investors" reshaping the capital markets in the public interest. But an acute democratic deficit separates this theory from the reality.
We are, for the most part, totally disconnected from decisions about our money. Pension funds delegate key decisions to City fund managers, who are themselves part of the corporate elite, and for whom FTSE 100 companies mean big business. It's little surprise that these firms have been less than enthusiastic about challenging high pay. The latent potential of mass ownership has gone unrealised because power is still being hoarded in the City.
But this is not inevitable, and change is in the air. In the wake of the Barclays vote, responsible investment charity FairPensions has launched "Your Say on Pay". This online action tool will email your pension fund or Isa provider and tell them that you want them to vote against excessive pay. It will also ask them to let you know what they do about it.
Of course, they don't have to respond. Legally speaking, your rights to information about what goes on with your money are shockingly minimal. But asserting those rights is the first step to greater accountability. It's all too rare for funds to hear from the savers they represent. Those who exercise power on our behalf need to be reminded that it's not their money. And the more of us speak up, the harder it becomes to ignore us.
None of this is to say that government has no role in ensuring shareholders do their job properly. The legal framework must support and nurture a civil economy. Institutional investors should be legally required to publish their voting records so that ordinary savers can hold them to account. The government must also make it clear that investors' legal duty to us does not begin and end with maximising the next quarter's profits.
Neither is this a ringing endorsement of shareholder supremacy. Shareholder capitalism has much to prove. But we are part of the system whether we like it or not. The choice lies between stepping aside and leaving the field to vested interests, and stepping in to hold our agents accountable.
Those on the left who dismiss shareholder power as a dead duck are letting the City off the hook. They're also missing an opportunity. By asserting our collective agency as economic citizens, we can begin the process of democratising finance and building an economy that benefits society as a whole. Whether the shareholder spring proves to be a one-season wonder or something more permanent may yet be up to us.
Jon Cruddas MP for Dagenham & Rainham