Jon Spector, CEO of The Conference Board, led a conversation with Michael Fallon, Member of Parliament for Sevenoaks and Member of Treasury Select Committee.

Ladies and gentlemen of the Risk Exchange audience, let me caution you: this conversation was rapid fire!!! I took as many notes as possible and tried to keep up with all of the points brought up, but I must say: what follows below is merely a paraphrased conversation. Neither Mr. Spector nor Mr. Fallon should be quoted! Information presented below is merely to give those not in attendance the gist of the positively interesting (and fast!) conversation between these two experienced and thoughtful men.

With that said…

Mr. Spector led the discussion, but threw the floor open to the audience from time to time. It made for a dynamic conversation, much appreciated after a long day. To wit:

JS. Are there steps companies should be taking to limit executive pay? Is executive compensation an issue?
MF. Yes. Governments need to determine, for example, proportionality of compensation.

JS. How do you determine proportionality?
MF. Profits, revenues, relationships to previous years, remuneration generally across the company – all of these elements must be taken into consideration. One cannot tackle it in isolation. If there is no relationship, it becomes unbelievable to the public.

JS. Are there companies we think that are fully ignoring these points?
MF. Governance has improved, especially in terms of transparency. Non public companies, however, are able to get away with more.

JS. It’s a complicated process you describe.
MF. [here MF responded with questions of his own]: Is there accountability to the compensation committees? Are they answerable to shareholders? Was there shareholder activism, or was there opportunity for it?

JS. Now for the role of government. What have you done in the UK?
MF. Requiring annual vote on compensation report, compensation committee chairman, annually. Regulators should have authority to issue mandatory guidance at below board levels, such as pay ratios from highest to lowest pay rates.

JS. Most CEOs are nervous about impending scope of regulatory changes. What do risk managers think of these looming changes? Relief? Concern? Does it make your job more difficult?
Audience: Quite bluntly it’s a waste of time. Compensation has little to do with the riskiness of a company’s situation.
MF. It was not the level of compensation that brought banks down, but some might have encouraged shorter term thinking and strategies. Second, lots of public money has been put to boost the banking system, indeed upwards of 74% of UK GDP. Given high levels of compensation, and huge cost of bailout, the government and people deserve a say in pay structure.

JS. Will new regulations hinder ability to compete?
MF. It’s a strong argument deployed by European banks. Nevertheless, it’s a real and serious issue in UK that must be dealt with. It’s one reason the one-time windfall tax has been introduced in UK. MF is not a fan of windfall taxes, but tax money must be recouped and banks have actually benefited from receiving cheap money to turn into extraordinary large profits. The taxpayer is deserving of a share of that.

UK banking sector is 4 times size of UK’s economy(!!)


JS. On the societal aspects of executive pay: is it a populist issue? If it is, how do companies respond? Is the populist outrage over compensation at a dangerous level? Is there too much scrutiny? Is the populism falling? What are the implications?
Audience: Society definitely has an issue in Nigeria. Corporate remuneration is definitely an issue, including executive tenure.
Audience: Yes, we have a societal issue. Not just in finance, but in other sectors like energy. …There has to be accountability, that there are consequences for irresponsible behavior.

JS. Are we at a societal breaking point?
MF. There is an enormous backlash. And now there is a realization that banks and financial institutions are different kinds of companies than mainstream companies, and now the trust put into these institutions has been fractured.

When people see it is their money at stake, they take a proprietary interest in the fairness of corporate actions.

Audience: Analogy – movie stars get paid almost as much as traders on Wall Street, but there is no outcry for expensive films or actors. The reason is: they are not too big to fail. If they fail, so be it. With banks, that’s different: too big to fail has massive consequences on societal fabric. Maybe we need to make sure banks are not too big to fail.
MF. You don’t have to go to the movies, but you do have to have an institution to deposit and handle money transactions. But what makes bank execs so special that they cannot get out of bed without tremendous bonuses?

Think of General McChrystal in Afghanistan. He is protecting the security of an entire country, yet he does not demand the same kind of compensations.

…

MF. UK does not have nearly as much competition between banks as in the U.S. In UK, why aren’t new banks, such as in retail sector, coming online? How do we stimulate competition in UK?

On shareholder activism – shareholders need to be more involved in the compensation process.

Audience: There is a history of director linkngs, a I-scratch-your-back, you-scratch-my-back mentality.
MF. Not anymore. Banks are losing the rationale for this behavior. If they don’t get out and explain their behavior, regulators will come after them. Transparency is a must that should increase rational behavior.

Audience: Regarding competition: there is an argument that competition increased market uncertainty that forced banks to create more attractive packages for new customers, that may not have been in the best interest of the public.
MF. To an extent, that was true. But the top 5 banks maintain control over 75% of certain banking sectors in the UK. The point MF wants to make is that there may be too many barriers to new entrances into the banking industry.


JS. Prediction: This issue will ebb and flow, but it will come back again, because of one law – law of unintended consequences. We need to invest into the science of executive compensation.

***

With that, the discussion ended. A large group swarmed the stage to further pick the brains of Mr. Spector and Mr. Fallon. Another large goup headed for the cocktail hour... all in all, a very full and productive day!

Posted by Shaun Randol at 4:57 PM