At the weekend, David Cameron signalled the government’s intent to curb excessive and undeserved executive pay. FTSE 100 companies’ performance has flatlined whilst executive pay has continued to rise. Furthermore, workers in those firms and especially in the wider economy have seen freezes or even cuts to their pay, where they have been fortunate enough to keep their jobs in the first place. So the government’s intervention in this area is welcomed by many who see such wide disparities as unjust. However, I contend that state intervention in this area is unnecessary, counterproductive and illiberal. I shall deal with each point in turn.

Government intervention is unnecessary

Directors of a firm have a duty to act in the interests of the company, which in everyday terms would be to increase profits so as to increase shareholder value. It is the role of the shareholders to elect the members of the board. In other words, having stumped up capital for a venture, it is the shareholders that choose the team that run the show. So if shareholders continue to support the board and keep the directors in post despite less than stellar performance, that is their choice. There must be a presumption that shareholders are capable of acting in their own self interest by investing in or withdrawing from companies and by approving or rejecting the composition of the board. This holds true for all classes of shareholder. For large institutional shareholders, there may be an argument that suggests that they are not sufficiently engaged with the board. On the other hand, if they are acting in the interests of their companies and customers it may be that the most effective way to send a message to the board that they are dissatisfied with their performance is to cash in and check out. Shareholders do not manage companies, that is the board’s job. So government intervention is not necessary to protect shareholder interests.

Government intervention is counterproductive

It is probably glib but true, if you want anyone to bugger things up, get the government to do it! Bringing forward legislation in this area is beneficial to the law industry and very few others. No matter how well drafted the legislation appears to be, irrespective of how much consultation and preparation before hand, additional legislation will bring additional litigation. As strong anecdotal evidence from government difficulties over tax demonstrates, the strong desire of the state to establish rules is easily overtaken by those who do not wish to be bound by them, particularly if they are powerful. What additional legislation will provide is an additional distraction for the board. As well as running the company, maximising profits, increasing shareholder value, and delivering products and services to customers, the new rules will provide a distraction with no added value to the company. Almost inevitably company resources, either directly or indirectly will be diverted towards attending to these new rules and regulations. Additional money will go into governance, scrutiny, oversight and audit, increasing costs and leaving less for shareholders to receive in dividends. Given the pitiful track record of audit, it is difficult to see how effective new legislation will be a t altering boardroom culture.

Government intervention is illiberal

Clearly if the intention of a piece of legislation is to curb some activity it is, by definition, to some extent illiberal. But added to this, the extra costs of devising, implementing and maintaining any new arrangements will benefit a few, mainly the law industry, not the many. It is a futile attempt to make the rich less rich but does nothing to make the poor less poor. Nevertheless the cost of enforcement will be met from taxation which in turn means either higher taxes or reducing spending somewhere else to implement these measures.

Is there an alternative?

Yes, obviously – leave these overpaid executives to find out the hard way that being overpaid for poor performance doesn’t wash. Shareholders can decide not to re-elect poorly performing and ineffective directors. If prices for good directors are rising, that is a clear signal that there is a shortage of talent. On the other hand, if an elite is throttling the market (i.e. a cartel) then an injection of competition is required. In any commodity market, high prices for poor goods would not be sustained for very long in the face of free competition. The market failure in the board room is that the market is being prevented from working.