The CEO of Persimmon, the FTSE 100 housebuilder, is back in the news. Having initially refused to turn down his eye-watering bonus, then saying he would donate an unspecified amount to charity, Jeff Fairburn has now graciously agreed to take a £25 million cut. In this self-sacrificing act of austerity, Fairburn’s bonus has withered to just £75 million. Yes, £75 million.
To be fair, the CEO has met his contractual targets, and so legally he’s earned his bonus. In his initial, jaw-dropping defence of the payment, Fairburn said he and his team have “worked very hard”. Well, when you put it that way; I’m sure the bricklayers and roofers and carpenters doing the back-breaking work of constructing Persimmon’s houses understand that hard work needs rewarding. In those professions, average weekly wages are around £500.1
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Yet, even if we were to accept that the hard work of a CEO is so much more valuable than the hard work of those ordinary tradesmen, Persimmon’s success is in no small part thanks to you and me – through our taxpayer monies, in the form of the Government’s help-to-buy scheme. As the Guardian reported in January, in 2016, more than half of the housebuilders sales were to help-to-buy recipients. And the company’s share price, which is directly linked to the executive bonus scheme, soared as a result of the government programme. So where’s our bonus?
Fairburn isn’t the only Persimmon executive to have done well off the back of the Government’s ill-advised scheme. Mike Killoran, the housebuilder’s Finance Director, is making do with £53 million (a £24 million cut) and Dave Jenkinson, Managing Director, is taking home £38 million (£2 million less than planned). Not quite as high as Fairburn’s windfall, but when you’re counting in multi-millions, it’s all extreme.
In fact, just this week, household bill management and auto-switching service Look after my bills published new research revealing that total FTSE 100 executive and non-executive director pay has surpassed £1 billion. We tend to fixate on CEO pay, but as Edward Molyneux, author of the research, says: “Excessive pay is becoming endemic across senior teams in business.”
This has given the wider executive network a free pass, at least in a PR sense. And that is particularly so when it comes to non-executive directorships (NEDs), those well upholstered seats around the board table.
The average NED does 27 days a year, the equivalent of just over a month’s worth of work, for an average fee of £102,591. Some earn considerably more, for example two of HSBC’s independent NEDs receive more than half a million pounds each, two of GSK’s get around £400k. In fact, total remuneration of non-executive directors across the FTSE 100 equates to more than £80 million.
So what are they paid to do? According to the Institute of Directors, the purpose of a NED is to provide “independent oversight and constructive challenge to the executive directors”. In the jargon, it’s about sound corporate governance. Which brings us back to Persimmon.
The pay package that resulted in a £100 million bonus for the CEO was agreed by the board, which means it also passed their remuneration committee. Both the board chairman and the head of that remuneration committee resigned at the end of last year in recognition that the bonus scheme had been badly designed (specifically, in lacking an earnings cap). In 2016, according to Persimmon’s annual report, chairman Nicholas Wrigley earned £210,578.
In an interview with UnHerd, the Conservative MP Jacob Rees-Mogg spoke of the “slightly clubby nature of non-executives who seem to sit on a number of boards and all tell each other how wonderful they are”. Company boards are both symptom and cause of the cronyisation of capitalism. What is a corporate scandal if not a failure of non-executive directors, as much as the executive directors, to fulfil their responsibilities? And that extends well beyond setting executive pay. Just think of some of the most recent examples:
- The massive data breach at Equifax which compromised the sensitive data of more than 140 million Americans. The credit rating agency’s cyber security standards have been deemed inadequate. What was the board’s risk committee doing?
- The £250 million accounting scandal at Tesco, which has resulted in three former executives standing trial for fraud. Shouldn’t the audit committee have clocked that?
- The Volkswagen emissions scandal, which saw the company cheat environmental standards by fitting “defeat devices” to their cars. Were the car manufacturer’s NEDs asleep at the governance wheel?
And let’s not forget the financial crash, which exposed irresponsible behaviour across the banking sector.
If successful scrutiny is asking the right questions, usually tough questions, then “clubby” corporate boardrooms are anathema to effective corporate governance. NEDs must be truly independent, genuinely outsider voices working to ensure the long-term health of the company. Yes, we should be outraged at sky-high executive pay, but we should be even more outraged at those well-heeled businessmen (in the UK, three quarters are men, in the US it’s 80%) who sign it off. It’s time to scrutinise the scrutinisers.