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Effective action on executive pay requires a shift in attitudes

Optimism would rise several notches if a single chairman of a FTSE 100 firm stated publicly that boardroom pay at his or her company had become divorced from performance

Many elements of Vince Cable’s attempt to correct the market failure in executive pay should be cheered.

Legislation to force more transparency and simplicity in company’s pay reports? Quite right: left alone, pay committees will spout pages of jargon to avoid giving a single figure for how much a director could make.

Publish the fees of the remuneration consultants? Good idea: pay committees, if they’re doing their job properly, should not outsource their thinking.

More diversity in the boardroom? Bring it on: it’s hard to make mandatory but some of the excuses from Backscratchers plc should make for good sport.

So why did Cable’s statement – much anticipated, much leaked – feel underwhelming?

It’s not because the government insisted that placing a worker on pay committees is a non-starter – that decision has been clear for ages. No, the disappointment lies in the realisation that a series of small measures won’t count for much unless there’s a meaningful shift in the attitudes of shareholders and directors themselves.

Cable is honest on the point. He claimed only to be trying to create “a more robust framework” for the setting of executive pay. “Lasting reform depends on active shareholders and responsible businesses accepting the need for change and pushing the agenda forward,” he said.

Believe investors’ and directors’ commitment to reform when you see it. As recession beckoned in 2008, big British businesses also pledged to show restraint and, for a single year, there was a slowing of the rate of growth in boardroom salaries. As soon as economic clouds cleared, however, normal unrestrained service returned. Indeed, it felt as if big-company directors were trying to retrieve what they felt they were owed after a year of relative sobriety.

If this time is to be different, institutional shareholders will have to find the will to say ‘no’ more often. In theory, a binding vote of future pay policy will concentrate minds – so that measure gets another cheer. But what form will the binding vote take? Progress is slow. Having issued a discussion paper last autumn, Cable now proposes a consultation. As it happens, the best mechanism looks to be the one the business secretary mentioned in parliament – a 75% threshold for a successful vote, as applies to special resolutions at annual meetings.

But optimism for real reform would rise several notches if a single chairman of a FTSE 100 firm stated publicly that boardroom pay at his or her company had become divorced from performance. The CBI, belatedly, has recognised in general terms that there is a problem. But that’s not the same as a captain of industry admitting to failings in his or her own backyard. Don’t expect a flurry of confessions. Expect instead to hear chairmen argue that the problem lies in other people’s boardrooms. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds