Guardians of the pay galaxy

Asset managers manage shareholders’ investments in company shares, acting as agents charged with ensuring that companies are compliant with principles of good corporate governance. Any time an agent acts on behalf of a beneficiary, there is the potential for a conflict of interest to arise. This occurs when the interests of the beneficiary and the interests of the agent are not aligned.

One particular corporate governance principle that asset managers are responsible for overseeing is the transparency and legitimacy of executive pay. Oversight of this principle gives rise to a potential conflict of interest between asset managers and the ultimate shareholder. Asset managers indirectly benefit when executives and managers of public companies receive higher salaries, as they are more likely to be able to demand higher wages themselves. In fact, the Financial Times reports that asset managers could be paid more on average than investment bankers within the next year, indicating that they are already firmly entrenched in what the High Pay Centre calls the “high pay culture.” The Institute of Directors argues that when asset managers are part of the high pay culture, they are less likely to protest against the culture of high pay at other companies.

In order to minimize this agency problem, shareholders should be armed with tools to ensure that asset managers act in their best interests. One such tool is information: asset managers should be required to disclose how they vote on resolutions raised at annual general meetings, including those on a company’s remuneration policy. Requiring the disclosure of this information would enable shareholders to demand both explanation and action from their fund managers on important issues.

The Financial Times has also reported that the Institute of Directors is calling for fund managers to disclose their pay levels and policies to clients. The disclosure of remuneration policies at asset management firms would provide useful information to shareholders on the incentives facing fund managers. It would allow clients to ensure that their asset managers are incentivized to act in their best interests.

However, disclosure of actual pay levels would be counterproductive. When public companies were required to disclose executive remuneration levels, we began to see companies using high pay at other companies to justify their own remuneration levels. As a result, we have seen huge pay packages become the market standard as companies benchmark themselves against one another. The requirement to disclose executive remuneration has resulted in a situation where it is very difficult to restrain pay. If fund managers are required to disclose this information, it is likely we would see the same result. A fund manager could use pay at a competitor to justify demands for a raise.

More transparency and information from asset managers is definitely needed; more justification for higher pay is not. Shareholders should be armed with greater information on how asset managers are incentivized and how they are voting at annual general meetings on remuneration resolutions. However, disclosure of salary figures would not arm shareholders with useful information; it would instead arm fund managers with the tools necessary to argue for even more.

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