Amid the widespread concerns about growing inequality and excessive executive pay, I frequently think about Kurosawa’s classic 1954 movie Seven Samurai. It isn’t the samurai who come to mind, but rather the brigands who prey on the villagers who hire the samurai. The brigands’ business model is an effective one: they descend on the village after its harvest and steal food and anything else that takes their fancy, leaving just enough for the villagers to eke out a living for another year until the next harvest comes. The cycle is endless. The villagers get poorer and the brigands get richer.
Corporate brigandage follows a slightly different model. It still operates on a ‘creaming off’ basis, but it uses stealth rather than force. The stealth in question manifests as a gradually increasing diversion of profit into CEO and senior director pay. Think about these (2018) numbers: FTSE 100 companies generate profits of over £312 billion from revenues of just over £2 trillion; that’s an average of 3.12 billion in profit; 1% of that is £31,200,000. So, we might then ask, who is going to notice if 1% of profit is quietly re-routed into CEO pay?
Of course somebody will notice, because these numbers are a matter of public record. The problem is that those most likely to notice are part of the merry-go round. The brigandage is locked in:
- Institutional investors own most of the shares, and their CEOs and senior directors are part of the disproportionate reward process.
- Much CEO pay is disguised in the form of share options.
- CEO pay is set by remuneration committees, typically made up of non-executive directors whose own income is dependent on a general, ill-defined ‘standard’ for CEO pay in large companies. These individuals have a vested interest in turning a blind eye to excessive remuneration.
- Emphasis on ‘shareholder value’ rather than any other measure of corporate success compounds the process: institutional investors will be satisfied if corporate behaviour patterns (e.g. borrowing at historically low interest rates to finance share buy-back schemes) increase the value of their holdings.
- Small, private investors who might be expected to blow the whistle on corporate brigandage tend to be insulated from the mechanics of the process – they invest at one remove through ETFs, Investment Trusts, Unit Trusts etc.. Are these private investors going to notice? Probably not while the value of their investments increases – and don’t forget, fund managers will always direct attention to the ‘long term’ if there are any downward blips.
None of what I am talking about here is particularly original. The trends and processes are well-documented, and in the public domain for anybody motivated to go looking. What I think is important is the terminolgy that is used to describe all this. As long as it seen as a natural part of the process of market capitalism, then the mainstream tendency will be to regard it in an uncritical light. Change the terminology, call it ‘brigandage’, draw the analogy with Kurosawa’s Seven Samurai, and things start to look different – grounds for opposition are more apparent.