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05 Jul. 2012 | Comments (0)

Vince Cable, Britain's Business Secretary, proposed yesterday to Parliament that shareholder votes on executive pay become binding on their companies. The measure is expected to pass.
The idea has received support from many quarters. Manchester Guardian columnist Deborah Hargraves explains why:

Large pay disparities are bad for business and the economy, as well as for society. More unequal societies suffer higher levels of social unrest and increased morbidity rates. The gulf in pay rates that now puts chief executives on 190 times average wages, feeds a widespread feeling of unfairness and the sense that the wealthiest are not shouldering their fair share of economic distress. It also undermines public trust in the corporate sector.

Gavin Oldham, chief executive of retail stockbroker The Share Centre, offered an investor's rationale:

Institutional shareholders are now realising what personal investors have actually understood for a long time—that executive pay matters and they need to take more attention of the general conditions of the economy and how their employees are getting on.

Various other commentators opined that the rules were too complicated, or didn't go far enough.

In this blog, we look at the evolution of the system of capitalism, and we see in this news a milestone on a significant road: the rebalancing of the interests of stakeholders in advanced economies.

In the beginning of the American industrial revolution, pioneers—Carnegie, Rockefeller, J.P. Morgan, et al.—built enterprises and their own fortunes by aggressively using the newly available economics of mass production and commerce. But as they followed the incentives of this system, practices arose that the U.S. society would not countenance. The treatment of workers led to laws protecting labor, culminating in the National Labor Relations Act in 1935. The abuse of market power led to anti-trust laws such as the Sherman Act (1890), the Clayton Act (1914), and the Robinson-Patman Act (1936).

The society enjoyed the enormous value added by industrial society—but eventually rebelled against the power it allowed the corporate sector to gain over workers and consumers.

We're seeing a replay. The pivotal issue of skewed income distribution, as Hargraves points out, is a far-reaching one for the West. Recent data show the U.S. middle class had fifteen years of wealth accumulation wiped out by the recession, that the U.S. is in fact a less mobile society than France, and that "the one percent" has been the only group to gain from economic growth in the past twenty years. Such data points fuel the sentiments behind developments from Occupy Wall Street to Mr. Cable's measures.

Certainly the next step in Britain will be political squabbling over the specifics of these rules. But history is on their side. And what is striking is that, unlike the never very clear demands of the Occupy movement, making companies accountable for executive pay packages in a public way is a well-defined new feedback loop.

Robert Peston, Business Editor of the BBC, noted that "the reforms should change the balance of power between investors and boardrooms." But forget the investor accountability—that doesn't change the political balance of power at all, since investors and CEOs are essentially the same people. Making boards accountable to the public for the executive pay packages they approve—rather than accountable to management teams for paying them competitively in what has become an arms race—is the important new step. And don't think it's the last.

This blog first appeared on Harvard Business Review on 06/21/2012.

View our complete listing of Compensation & Benefits and Strategic HR blogs.

  • About the Author: Chris Meyer

    Chris Meyer

    Christopher Meyer is coauthor of the book,  Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere, and founder of Monitor Networks, where he consults on…

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  • About the Author: Julia Kirby

    Julia Kirby

    Julia Kirby is an editor at large for HBR. She is coauthor with Chris Meyer of the forthcoming Standing on the Sun.

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