Stop corrosive carping over pay

AN announcement that would have passed most people by this week said that John Sunderland, former chief executive and now the chairman of Cadbury Schweppes, and Sir Ian Robinson, former chief executive of Scottish Power and chairman, until it was taken over, of Amey have joined CVC, one of the leading private equity groups.

Nothing unusual in that, you might say - big hitters from the commercial world are moving into private equity on a daily basis. That, though, is the point. At a time when listed companies are struggling to recruit enough people of quality to serve as non-executive directors and expose themselves to the growing risks and responsibilities that come with such positions, the opaque world, focused objectives and substantial rewards of private equity, can seem distinctly more attractive.

Each row over pay, and there seems to be one every week, probably sends another half-dozen young, ambitious managers down the same route into private equity or prompts the seriously ambitious to work in America.

Salomon, when it was an independent-New York house, used to work on the basis that it should have at least one person who earned a ridiculous amount of money because it would make everyone else in the organisation aspire to the top job. That still seems to be the model for most US corporations.

Only this week it was disclosed that Hank Greenberg, chief executive of American International Group, one of the world's most successful insurance companies, got 650,000 stock options last year on top of his $7.5m (£4m) pay. It is unlikely that even he needs the shares as a long-term incentive because he famously will be 79 next month. Greenberg remains very much in charge, however, and despite his sons leaving AIG to work elsewhere in insurance, he has shown no inclination to announce a successor.

Such arrangements would cause outrage over here, regardless of the success of the company, but passes without a murmur in America. Corporate governance means something different over there. Their system essentially allows executives to do what they like and take what they like, but if it goes badly wrong there is a distinct possibility that some ambitious district attorney will come looking to get them banged up.

It may not be a better system, but it is beginning to seem preferable to this daily diet of rows over executive remuneration at the expense of almost everything else in Britain, the corrosive effect of which on public confidence should not be underestimated.

As this is not America, public company boards and institutional shareholders need to think through where these rows are leading and consider how they might temper their behaviour now to avoid the almost inevitable prospect, if they continue down the current path, of Government intervention.

Insurers' grouse

THERE are a lot of happy faces in the insurance industry at the moment because most well-managed businesses are making exceptionally good profits, thanks to the shortage of capacity after the long industry recession and the rapid escalation of premium rates following the 9/11 attacks in 2001.

It is a cyclical business currently riding the upswing of the cycle and enjoying it. If the businesses have one complaint, however, it is that their current good figures do not seem to be impressing the debt rating agencies.

A good debt rating is crucial to most insurance companies because commercial customers will not deal with a firm they think might go bust on them. What, after all, is the point of transferring risk to a business which the market says is more risky than the original owner?

So insurance suffered somewhat earlier in this decade when for very good reasons the debt agencies marked them down, implying that they were more likely to default. By and large the insurance industry did not protest then. But it does protest now at the absence of upgrades.

The view has gained ground that the rating agencies have become ultra-cautious. They have, of course, come in for criticism for being slow to spot the problems in firms that subsequently went bankrupt. It would be only natural if this prompted them to become significantly more risk-averse to minimise the chances of being caught out again.

But it does not endear them to firms which think they deserve a higher rating.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in