Global income inequality has grown steadily for the past decades & has
now reached its highest level on record
The real ratios of income inequality around the world
have become incredible. The Walton family (Wal-Mart) in the US has as much
wealth as the bottom 35-40%. Sweden has the highest share of wealth held
by the top 10% in Europe, followed by Germany and the UK, Finland and Italy
. The leading industrial family in Sweden, the Wallenberg family, have controlling
interest in major companies like ABB, Ericsson, Electrolux, Atlas Copco,
SKF, AstraZeneca and Saab and doing an excellent job for the Global economy.
While pay for the CEO of a typical
large public company surged 9 percent last year to an average of $10.46
million in the US, it rose a scant 1.3 percent for US workers as a whole.
A typical CEO in the US now earns 257 times the national average, up from
a multiple of 180 in 2009.
Corporate governance and company law are essential to ensure that companies
are well-governed and sustainable in the long term and therefore have
an important role to play in the long-term success and creating values
for the stakeholders.
One of the recent Governance and Company Law directives is the EU commission's
adoption on Say-on-Pay in 2014 primarily based on the heavily criticized
Dodd-Frank act of USA. The committee reiterated that the primary reason
for adopting the Directive is found in the statistics: Between 2006 and
2012. The average Board of Directors remuneration increased e.g. by 94%
in France and 27% in Austria - while share prices in the same period have
fallen by 34% in France and 45% in Austria. Another reason is that 37%
of all minority shareholders never vote on the companies' general meetings.
The other reasons include that only 39% of the shareholders are in regular
contact with the companies.
No binding cap on remuneration
Thereby the EU commission concluded that there is an inadequate relationship
between management pay and performance probably due to harmful short-term
tendencies. As in Dodd-Frank the EU proposals encourage greater clearer,
comparable and comprehensive disclosures and information on their remuneration
policies and how the pocilies are put to practice.
Therefore, we suggest that each company must place the remuneration policy
to a binding shareholder vote. The plan must include a maximum level for
executive pay and explain how it contributes to the long-term interests
and sustainability of the company. Further explain how the pay and employment
conditions of key employees of the company are taken into account, when
setting the say on pay system. As a gimmick on can also include or explain
the ratio between average employees and executive pay.
Elsewhere in this newsletter we examine some of the different reasons
why some CEOs are not listening to the advice on executive behavior, by
John Kenneth Galbraith in his 1967 book, ''The New Industrial State''.
In the book he recommends: Management must not ruthlessly reward itself
-- a sound management is expected to exercise restraint. The corporation
will be a chaos of competitive avarice if there are are no codes or acts
to enforce a high standard of personal honesty. If he were to rewrite
the book today, the title would probably be: The new Gilded Governance
of Excesses due to widening global inequality, rich and tasteless lifestyles,
the gap between the very rich and the rest. His social approach would
elaborate on class warfare and why the debate on the profound corporate
effects of the economic, social and political issues related to the widening
gap.
The million dollar question that we need to answer how much gap or CEO-worker
pay ration is necessary to inspire innovation, excellence, and risk-taking.
Moreover, when will the obscene or excess ratio would lead to societal
breakdown, unjustifiable poverty and dangerous concentrations of power.
The new directive on Say on Pay is a small step in that direction.
We continue our series on Say on Pay in the next Newsletter. The title
of the article is: Governance like democracy needs constant self-examination
to retain its vitality.
