Exec pay, power, voting and behaviour
Some inter-related bits and pieces
Stefan Stern had a great piece in The Guardian last week about the upwards pressure on UK executive pay. I won’t rehash it, but just to quickly add a further thought of my own.
It is clear that some people in the institutional investment world believe that engagement over executive pay is now counterproductive as it may be hampering boards’ ability to recruit and retain executive talent. Clearly these are legitimate views, even if I do not share them. But they do need to be openly articulated. If an investor is changing its orientation - becoming relatively more tolerant of higher rewards for executives, even if this potentially contributes to increases in intra-firm pay differentials - this ought to be explained to clients.
An assumption that investor engagement around executive pay can simply change direction without consequence strikes me as a rather risky. The rights investors have been granted in recent years - to greater information and to vote on remuneration - were not provided with the expectation that they would be utilised to support higher levels of pay. If this becomes the case this may lead to questions whether those rights are justified and/or whether other forms of intervention around executive pay are required.
Investors clearly play a powerful role in corporate Britain. If the stewardship activity of some is potentially going to be a force in support of increased income inequality this does need to be out in the open. It should not simply be a discussion amongst senior corporate and financial leaders.
Relatedly, Stefan also links to an excellent article by Angus Deaton which I strongly recommend to anyone interested in the same sort of topics as me.
The whole thing is worth a read, and some of it is challenging. Three (related) points particularly caught my eye. First, on power:
Power: Our emphasis on the virtues of free, competitive markets and exogenous technical change can distract us from the importance of power in setting prices and wages, in choosing the direction of technical change, and in influencing politics to change the rules of the game. Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.
Second, on efficiency:
Efficiency is important, but we valorize it over other ends. Many subscribe to Lionel Robbins’ definition of economics as the allocation of scarce resources among competing ends or to the stronger version that says that economists should focus on efficiency and leave equity to others, to politicians or administrators. But the others regularly fail to materialize, so that when efficiency comes with upward redistribution—frequently though not inevitably—our recommendations become little more than a license for plunder. Keynes wrote that the problem of economics is to reconcile economic efficiency, social justice, and individual liberty. We are good at the first, and the libertarian streak in economics constantly pushes the last, but social justice can be an afterthought. After economists on the left bought into the Chicago School’s deference to markets—“we are all Friedmanites now”—social justice became subservient to markets, and a concern with distribution was overruled by attention to the average, often nonsensically described as the “national interest.”
Third, on unions:
Like most of my age cohort, I long regarded unions as a nuisance that interfered with economic (and often personal) efficiency and welcomed their slow demise. But today large corporations have too much power over working conditions, wages, and decisions in Washington, where unions currently have little say compared with corporate lobbyists. Unions once raised wages for members and nonmembers, they were an important part of social capital in many places, and they brought political power to working people in the workplace and in local, state, and federal governments. Their decline is contributing to the falling wage share, to the widening gap between executives and workers, to community destruction, and to rising populism. Daron Acemoglu and Simon Johnson have recently argued that the direction of technical change has always depended on who has the power to decide; unions need to be at the table for decisions about artificial intelligence. Economists’ enthusiasm for technical change as the instrument of universal enrichment is no longer tenable (if it ever was).
The longer I have worked on and thought about these issues, the more I have come to similar conclusions. I think power, in particular, is of much greater importance than much discussion allows for. This applies both within firms (how much relative power do different stakeholders have?) and across sectors and markets (how much power do individual firms and groups of firms have?). Latterly, of course, we are seeing concerns raised about the concentrated power of some investors.
I’m reminded of the line that Ronald Coase quotes early on in The Nature of the Firm that corporations are “islands of conscious power in this ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk”. Coase was obviously interested in transaction costs - essentially the economic benefits of the firm as a site of non-market relations. A broader question is the extent to which individuals use, or seek, the power concentrated within the firm for its own sake. When we look at some CEOs it’s hard to believe that their ‘passions’ have been conquered by their ‘interests’.
On the question of unions, Deaton also made some insightful comments in an interview with the FT back in 2016 covering topics related to Deaths of Despair.
My guess is that economics and the decline of unions and the sense of not being represented any more prepared the soil for this horrible upheaval. They certainly lost these jobs in manufacturing and those jobs came with unions which provided them with representation. So they are deprived of that and that makes them more susceptible to suicide and depression.
This is a view I share. Aside from the economic benefits they provided to members, unions offered workers a sense of agency. As well intentioned (or not) as top-down initiatives by employers are they do not foster empowerment. I think that loss of agency is a deep scar.
Unions also fostered the practice of achieving change through structured, democratic methods - both in the workplace and in the unions themselves. No-one would suggest it has been perfect, but union general secretaries do get voted out, and more often than PLC leaders. Obviously there was also a significant overlap between the early labour movement and the Chartist movement. Both sought to provide a voice to workers.
Tangentially, on the topic of voting, I’m sad to report that there has been another outbreak of silliness about Voter ID. Once again proponents in the UK have been arguing that this is vital to stop vote fraud, and questioning why anyone would have a problem with it in principle. We expect people to have ID in lots of other areas, what is the big difference?
I think the argument is hard to sustain when you think about a) overall objectives and b) costs and benefits. On the first point, I’ve been significantly influenced by behavioural stuff I read a few years back now. A very simple but fundamental point is that if you want to encourage people to do something make it easy/easier, and if you want to discourage people from doing something make it hard/harder. This is a point David Halpern makes early on in this.
To give a real-life example, during the Covid-19 pandemic many authorities wanted to discourage people who might have the virus and/or were unvaccinated from travelling, or visiting crowded places. This was to meet the overall objective of reducing transmission of Covid. So we all got used to having to show our status on an app. No doubt there were ways round this (I heard some idiots bragging about it) but generally it increased the friction around the activities that were intended to be discouraged. Some may have found it intrusive, but it was in line with the objective.
In terms of voting, it seems reasonable to conclude that most societies believe that high voter engagement is a good thing, and low turnout is bad. The overall objective is ensuring enfranchisement. Therefore the behaviour we want to encourage is voting, and that in turn ought to mean making it easy/easier. Introducing voter ID increases friction / makes it harder and therefore is in conflict with the objective.
Of course discouraging vote fraud is also a desirable objective, but in this instance is in competition with the objective of enfranchisement, and the mechanism proposed to address it is in conflict with making/keeping voting easy. Therefore we have to make a choice. Is vote fraud a significant enough problem - for example leading to different electoral outcomes - to justify the risk of disenfranchising voters?
I don’t see enough evidence in support. I have no doubt that there is electoral fraud, but my guess is that its impact is highly marginal and I am doubtful it has any impact at all on electoral outcomes. Therefore for me accepting reduced voter turnout is too high a price to pay to support introducing voter ID.
When you start thinking about removal or introduction of frictional costs they can give you an insight into organisational objectives. For example, does the Government’s attempted removal of deduction of union subs from wages tell us, since this appears to increase the friction around collection of union subs? Similarly, what does the attempt to reintroduce tribunal fees, increasing frictional costs, tell us about its view about accessing workplace justice? Or, looking the other way, what does its refusal to allow electronic balloting reveal? Added together this suggests a certain orientation on worker empowerment.