The Davos Paradox: Executives have completely failed to show 'responsive and responsible leadership'
Executive pay is a clear indication that top executives are failing shareholders and employees. The theme of this year's World Economic Forum of 'responsive and responsible leadership' appears somewhat paradoxical in the context of the widening inequality gap between the wages of top executives and their own employees.
I often struggle to find affinity with the Daily Mail, but every now and then something catches my eye. Hugo Duncan’s piece on 16 January about a group of UK CEOs, who collectively earned £145 million in 2015, flying to Davos to tackle poverty, was one such piece (read it here).
It does seem rather paradoxical. After all, the theme of this year’s World Economic Forum is ‘responsive and responsible leadership’.
This group of CEOs have proven to be neither responsive nor responsible when it comes to their own pay packages. Recent years have seen a good number of shareholder rebellions over fat-cat pay including (but in on way limited to) Martin Sorrell’s £70.4 million award (WPP) and Bob Dudley’s £16.1 million pay deal (BP). Yet, despite those calls for restraint from some of the leading global investment houses and the UK government, CEOs continue to enjoy exorbitant increases in pay.
According to a report from Lancaster University Management School, pay for chief executives of Britain’s top 350 listed companies (FTSE 350) increased on average by 82% between 2003 and 2014. Returns for shareholders, meanwhile increased 8.5%. The report points to a “material disconnect between pay and fundamental value creation for, and returns to, capital providers”.
The High Pay Centre calculated that FTSE 100 bosses were paid 130 times as much as their average employee in 2014, up from 47 times in 1998. For WPP’s Sorrell, however, that multiple is closer to 800%.
Now consider that the combined pension deficit for the FTSE 100 alone as of 30 June 2016 is estimated by consulting firm JLT to be £117 billion (£42 billion more than it was a year prior). That feels a bit like salt rubbed into a wound.
This problem is not limited to the UK. A report from MSCI shows that while the wealth held by the top 20% in the US increased over 10% between 2000 and 2011, it has decreased for middle and low income populations. Data from companies in the MSCI ACWI IMI Index indicates executive pay among Europe-domiciled companies grew 22% annually on average between 2009 and 2014 while salaries for the average worker have grown at only 1% annually.
Yet, despite the staggering amount of data that underlines all the root causes of populism (and has done for some time now), Ray Dalio, billionaire and founder of Bridgewater Associates, the biggest hedge fund in the world, says he’s afraid of populism. "Populism is the No. 1 economic issue that market participants should be watching, more important than central banks," he said, speaking at the World Economic Forum on Wednesday. "I want to be loud and clear—populism scares me."
How populism can come as a surprise to these vastly overpaid executives and financiers is a little beyond my comprehension. Moreover, it should scare them. They’ve proven themselves to be blind to a situation they have created. Perhaps it’s time to take a good long look in the mirror.
Maybe then, we might stand a chance at seeing some real ‘responsive and responsible leadership’. Somehow, I can’t help feeling an exclusive gathering of the world’s elite is the right setting for that process to begin.
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A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund