Abstract
This chapter takes as its starting point Mancur Olson’s assertion in The Logic of Collective Action that his theory of group size and group behaviour has implications for the governance of companies. It explains why shareholders of public corporations are unlikely to solve executive pay problems because of a collective action problem, and how ideas about the governance of common pool resources have implications for the design of corporate governance mechanisms. A study of the FTSE 100 is used to illustrate the points raised.
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Notes
- 1.
Charkham, J. (1995). Keeping Good Company: A Study of Corporate Governance in Five Countries. Oxford, UK: Oxford University Press.
- 2.
Olson, M. (1965|1971). The Logic of Collective Action – Public Goods and the Theory of Groups. Cambridge, Mass: Harvard University Press, p. 55.
- 3.
Heath, J. (2014). Morality, Competition, and the Firm. NY, USA: Oxford University Press.
- 4.
Olson (1965|1971) p. 50.
- 5.
Hardin (1982|2013). Collective Action. London and New York: Routledge.
- 6.
Heath (2014) p. 51.
- 7.
Levenstein, M., & Suslow, V. (2006). What determines cartel success? Journal of Economic Literature, 46(1), pp. 43–95.
- 8.
The force which principals apply upon agents.
- 9.
Negative reputational effects are also possible. In the spring of 2016, Alison Carnwarth of Barclays, Dame Ann Dowling of BP, Judy Sprieser of Reckitt Benckiser, Sir John Hood of WPP, and Melanie Gee of Weir Group were all cited as remuneration committee chairs whose reputations have been damaged as a result of shareholder opposition to executive pay awards. Sources: Financial Times. Executive pay committee chiefs in the hot seat (May 3, 2016). The Times. Boardroom pay is off the scale and shareholder revolts will not reel it back (May 4, 2016).
- 10.
These equations are repeated at the funds level, creating a further set of agency and fiduciary relationships, where retail investors are principals and individual investment managers are agents. Depending on the structure of the relevant funds, these relationships may be mediated by non-executive fund directors.
- 11.
The Enterprise Regulatory Reform Act 2013 introduced forward-looking provisions requiring a company to obtain shareholder approval every three years for its directors’ remuneration policy. This is a binding vote, but it places a lesser obligation on the board than having to obtain approval for actual amounts paid.
- 12.
Financial Times: BP investors revolt over chief Bob Dudley’s 20% pay rise (April 14, 2016); Boards are responsible for limiting pay excess (April 18, 2016); Tyrie adds support to revolt on excessive pay (April 18, 2016).
- 13.
The data on which the analysis is based was obtained from Orbis http://www.bvdinfo.com/en-us/our-products/company-information/international-products/orbis
- 14.
The companies excluded from the analysis were TUI Group, Fresnillo, Schroders, Hargreaves Lansdown, Merlin Entertainments, and Sports Direct. The UK Listing Rules require a shareholder or shareholder group who could exercise 30% or more of the voting rights of a company to enter into a Relationship Agreement with the company which guarantees certain independence provisions designed to protect the rights of other shareholders.
- 15.
Another major investor is the Norwegian sovereign wealth fund – see Chap. 5, n17.
- 16.
Financial Times. BlackRock slammed over too many votes for high pay (May 22, 2016). The chief executive of BlackRock is overpaid (June 5, 2016).
- 17.
Becht, M., Franks, J., Mayer, C., & Rossi, S. (2008). Returns to shareholder activism: evidence from a clinical study of the Hermes UK Focus Fund. The Review of Financial Studies, 22(8), 3093–3129.
- 18.
Becht et al. 2008: p. 3102.
- 19.
Financial Times, September 18, 2012.
- 20.
PwC Report “ISS friend or foe to stewardship?” January 2018 https://www.pwc.co.uk/services/human-resource-services/insights/demystifying-executive-pay/iss-friend-or-foe-to-stewardship.html
- 21.
- 22.
These ideas are also consistent with proposals made in 2016 by a group of prominent public figures in the UK, led by Conservative MP Chris Philp, to establish shareholder committees, modelled on Swedish nomination committees, as part of the UK corporate governance code. They proposed that all large listed UK companies should establish committees, to be known as “shareholder committees”, comprising their five largest shareholders, chaired by the largest shareholder. Shareholder committees would have three principal powers and responsibilities. Firstly, they would replace nomination committees and assume responsibility for recommending the appointment and removal of directors for a vote of all shareholders at a company’s annual general meeting. This would: “make directors feel more accountable to shareholders and not to the board chairman”. Secondly, they would approve the pay policy and specific pay packages proposed by the remuneration committee before they are put to a binding vote of all shareholders at AGM. This would: “allow for proper scrutiny by shareholders before the AGM vote takes place”. Thirdly, shareholder committees would pose questions requiring a response by the main board, including on corporate strategy and corporate performance. This would: “formally empower shareholders to raise issues with the board, while still firmly leaving the board ultimately responsible for strategy and performance”. Philp, C., (2016) “Restoring responsible ownership – Ending the ownerless corporation and controlling executive pay”. High Pay Centre, September 2016.
- 23.
The Times. Boardroom pay is off the scale and shareholder revolts will not reel it back (May 4, 2016).
- 24.
Deakin, S. (2012). The corporation as a commons: rethinking property rights, governance and sustainability in the business enterprise. Queen’s Law Journal, 37 (2), pp. 339–381.
- 25.
Robé, J. (2011). The legal structure of the firm. Accounting, Economics, and Law, 1 (1), Article 5, cited by Deakin (2012), p. 352, note 31.
- 26.
Deakin (2012) p. 345.
- 27.
Deakin (2012) p. 346–347.
- 28.
Deakin (2012) p. 356.
- 29.
Deakin (2012) p. 363.
- 30.
Deakin (2012) p. 367–368.
- 31.
Jensen, M. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14 (3) p. 10.
- 32.
Poteete, A., Janssen, M., & Olstrom, E. (2010). Working Together – Collective Action, the Commons, and Multiple Methods in Practice. Princeton & Oxford: Princeton University Press, p. 100. See also Chap. 2, note 33 supra.
- 33.
- 34.
Fligstein , N (2016) The theory of fields and its application to corporate governance. Seattle University Law Review 39(2) p. 242.
References
Becht, M., Franks, J., Mayer, C., & Rossi, S. (2008). Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund. The Review of Financial Studies, 22(8), 3093–3129.
Charkham, J. (1995). Keeping Good Company: A Study of Corporate Governance in Five Countries. Oxford: Oxford University Press.
Coates, J. (2015). Thirty Years of Evolution in the Roles of Institutional Investors in Corporate Governance. In J. Hill & R. Thomas (Eds.), Research Handbook on Shareholder Power. Cheltenham: Edward Elgar Publishing Limited.
Deakin, S. (2012). The Corporation as Commons: Rethinking Property Rights, Governance and Sustainability in the Business Enterprise. Queen’s Law Journal, 37(2), 339–381.
Hardin, R. (1982|2013). Collective Action. London/New York: Routledge.
Heath, J. (2014). Morality, Competition, and the Firm. New York: Oxford University Press.
Hill, J. (2015). Images of the Shareholder – Shareholder Power and Shareholder Powerlessness. In J. Hill & R. Thomas (Eds.), Research Handbook on Shareholder Power (pp. 53–73). Cheltenham: Edward Elgar Publishing Limited.
Hill, J., & Thomas, R. (2015). Research Handbook on Shareholder Power. Cheltenham: Edward Elgar.
Jensen, M. (2001). Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Journal of Applied Corporate Finance, 14(3), 8–22.
Levenstein, M., & Suslow, V. (2006). What Determines Cartel Success? Journal of Economic Literature, 46(1), 43–95.
Olson, M. (1965|1971). The Logic of Collective Action – Public Goods and the Theory of Groups. Cambridge, MA: Harvard University Press.
Poteete, A., Janssen, M., & Olstrom, E. (2010). Working Together – Collective Action, the Commons, and Multiple Methods in Practice. Princeton/Oxford: Princeton University Press.
Robe, J. (2011). The Legal Structure of the Firm. Accounting, Economics, and Law, 1(1), 1–86, Article 5.
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Pepper, A. (2019). Executive Pay as a Collective Action Problem. In: Agency Theory and Executive Pay. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-319-99969-2_4
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