Chairmen of the board in the firing line again

With all the focus on bankers' bonuses, fatcats in Britain's boardrooms have very much been flying beneath the radar over the past couple of years. Yesterday offered a timely reminder that despite the grim economic times we are living through, it is still high summer for company directors. A survey by the proxy voting agency Manifest found that corporate Britain is still bedevilled by rampant bad practice when it comes to the vexed issue of boardroom pay.

The results presented a disturbing picture of the work (or lack of it) performed by the non-executive directors that populate the remuneration committees of public limited companies. To summarise: despite a brutal economic downturn characterised by cutbacks, pay freezes and falling profits, the average remuneration of a FTSE 100 chief executive has risen 5 per cent since 2008 to a staggering £3.1m. By contrast, companies' earnings per share declined by 1 per cent over the same period. In other words, shareholders are paying quite a bit more and getting less.

Why, then, is this happening, and is there anything that can be done to arrest a trend that can hardly be considered healthy? The same survey also found that CEOs can still pocket a packet if the companies they run put in barely adequate performances because of the way remuneration packages are structured.

Sarah Wilson, chief executive of Manifest, argues that there have been years of laissez-faire attitude to boardroom pay, particularly in the FTSE 100. "There has been the appearance of corporate governance but in reality it has been better in some places than in others," she says.

Remuneration packages in FTSE 250 companies and below tend to be much better than those in blue-chip companies, Ms Wilson says. Smaller companies often have big shareholders who carry the clout to force change. Their chief executives are often more entrepreneurial and have salary packages which are closely tied to performance when compared to FTSE 100 companies, which more often resemble big bureaucracies. Ultimately, Ms Wilson says, there is a lack of effective dialogue between remuneration committees, or "remcos", and shareholders and too much of a one-size-fits-all approach.

"Good pay for stretched targets is acceptable," she adds. "But instead of looking at a peer group and basing pay on them, remcos should instead look at a company, its strategy and goals and set pay based on those. Directors on remcos also need to be able to stand up to chief executives. They work for shareholders, not just for executives, who are the hired hands that run companies."

Ms Wilson also argues against "centralisation" of corporate governance, with fund managers often leaving it to organisations such as the Association of British Insurers.

The corporate governance consultancy Pirc concurs with the survey's findings. It pins the blame for the lack of action on excessive pay in the boardroom squarely on the shoulders of fund managers, many of whom, Pirc says, still fail to take a stand where it counts.

A spokesman for Pirc said: "There are still too many asset managers who don't vote or who only vote on a handful of issues, the obvious ones like Royal Bank of Scotland last year, which was easy. The Government, as the major shareholder, voted against the remuneration report because of Sir Fred Goodwin's pension.

"We did an analysis of pay with the Railways Pension Fund last year. We found that the link between pay and performance is getting better but it's still not good enough – when companies are doing well pay goes up a lot, and when they are doing badly it goes up a little bit. There has been some movement, but it's not enough."

Shareholders have had an advisory vote on company remuneration packages since 2003. But, according to Pirc, the average vote against remuneration reports comes out at just 17 per cent, rather low given what the Manifest survey has found. And there were only five companies last year where votes were lost: Punch Taverns, Shell, Bellway and Provident Financial in addition to RBS. Tesco (by most measures a company that performs well) also recently came close to losing its vote.

Pirc's prescription for what should be done is simple: move towards giving the current advisory votes on boardroom pay more teeth. This sort of suggestion has typically produced cries of anguish from corporate Britain, which likes to argue that it would be far too complex to achieve. But while Labour had pledged to address the issue if re-elected, the coalition only says that it does not rule out action in the longer term. Pirc says: "With the increasing move towards deferred bonuses and clawback, we are convinced that this presents an opportunity to give votes teeth. It could work."

The Trades Union Congress also believes investors are failing in their duty to police the companies they own. The TUC's general secretary, Brendan Barber, puts the blame on the golden circle of the City's elite, saying: "CEO pay has long been about a small City elite deciding what to pay themselves rather than being about genuine rewards for performance. This not only contributes to the very high levels of inequality in the UK, but also means there is not a strong enough incentive for British business to perform at its best.

"It is time for investors to get heavy with the people who run UK plc and demand that the money they invest on behalf of pension fund members and others is put to better use than subsidising weak CEOs' yachts and golfing holidays.

"The Government should also take a very close look at the way remuneration committees work and require a higher proportion of independent members from outside the gilded world of the Square Mile."

The Association of British Insurers is notably more cautious. Hugh Savill, its acting director of investment affairs, said: "Given the increased focus on remuneration, it is more important than ever that companies develop policies which are properly focused on linking pay to performance in delivery of agreed strategy."

While the ABI investment committee has done some good work, it is worth noting that while insurance companies hold a significant proportion of the FTSE 100, some of them have hardly been whiter than white when it comes to their own governance. Prudential, for example, has recently been exposed as having a string of corporate governance issues to deal with.

It is hardly a surprise, then, that its fund manager M&G prefers to remain silent on governance issues. But with bankers facing curbs on their bonuses, perhaps it is time to switch focus to the boardroom, where it is clearly time for the chickens to come home to roost.