The private investor alone will never be able vote down executive pay rises. Not if the big investment institutions vote with the board of directors.
A study published on the Harvard Law School Forum shows that fund managers are very likely to side with the management team. So unless shareholders each get a single vote, rather than voting based on number of shares held, David Cameron's plans are highly unlikely to work.
It has long been assumed that the large salaries of the investment managers mean that they are unwilling to criticise the remuneration packages of others. After all if the pay and benefits of company directors were limited, someone might then look at the huge salaries of the investment fund mangers!
The investment managers would then have to justify their own huge pay packets. Not easy when those funds usually return less than the market average. Examining the reasons for these low returns more closely you find that this poor performance is chiefly because of the costs charged back to the investor. A large proportion of these costs go in paying the fund owners and managers their own exorbitant salaries. Anyway back to the main subject.
The reason the institutions will vote with against a board of directors and against the private investors on pay.
Quite simply, a vote against the board might then limit the fund managers own pay! The study with the catchy title of " Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? " ( link ) demonstrates a financial link between how a fund family votes on executive pay and its own profitability. Less income for the fund also means less income for the fund manager. Few fund managers would allow that to happen.
This is how it works. Most blue chip companies will have a very large pension fund. That pension fund may well invest in a mutual fund family that in turn invests in the blue chip company.
Now put yourself in the place of the fund manger. If the fund manager votes to limit director pay what might happen? Could the board then somehow influence the pension scheme to move its investments to another mutual fund? If so millions might be withdrawn from the fund managers own mutual fund. That would in turn impact the investment mangers bonus.
So how many people would vote in a way the reduces their own bonus? Not many. Certainly not a fund manager.
Bad news for David Cameron, private investors and employees, good news for directors.
Paul is a key member of the InvestingDragon team. A small company dedicated to raising money to prevent River Blindness in the third world through financial education. We believe that by learning a few simple investment rules you can triple your investment return and help eradicate a crippling disease at the same time. Learn how at http://www.theInvestingDragon.com
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