Disclosure Rules

​One of the main themes in regulating executive pay and improving corporate governance is that of disclosure. The idea is that bad corporate executives operate in the stealth and shadows, concealing their astronomical salaries. If the law could force them to display what's going on behind closed gates, everybody including shareholders and nosy members of the public could have a look and express their disapproval and disdain. That would fix things.

Disclosing the facts of the matter is all well and good, but most people are not bothered about the facts. Facts are passé. In the 21st century what matters most is credible-sounding opinions. That's why everyone has an opinion about how corporations should be run and how much those who run them should be paid.

One of the dominant opinions competing for attention is the opinion that being rich is a suspicious state of affairs. Very suspicious indeed. Surely nobody can honestly earn huge amounts of money – anybody who is wealthier than most people must be cheating, or stealing, or at the very least being greedy and exploitative, which is obviously unacceptable. Disclosure rules should help with this, because everybody will be able to see their nefarious activities.

There is a proud tradition in corporate and securities law of using disclosure rules to regulate executive compensation. The idea is that it is very effective to name and shame companies that are paying their executive officers too much money, thereby whipping us all into a very productive frenzy of envy and jealousy that in turn prompts our democratically elected politicians to Do Something about all the overpaid executives who earn their wages through various forms of cheating. There is no proof that they are cheating, although once we see that they have earned too much we can find out what precisely they did, and pass a new law which defines that activity as 'cheating'. It's easy once you know how to propose law reform.

The idea of disclosing executive pay in large corporations historically began with demands from shareholders to know more about what their managers were getting up to. This was not a problem when everybody owned and managed their own business. But as soon as it became common for shareholders to hire professional managers to run the business for them, darkness covered the land. The shareholders no longer had any idea what the managers were doing or what the managers were paying themselves. So at the behest of shareholders the law lifted the lid on what was cooking in the corporate pot. The rest is history. A new age dawned. As soon as executive pay became public information, the shareholders became irrelevant. The potential to use this information to re-engineer society through redistribution programmes had now become the most important thing. Never mind the shareholders and their tragic little dramas. The point is that overpaid managers are just crying out to be subjected to forcible redistribution, aren't they, especially because nobody feels sorry for them. It's just hard to feel sorry for rich people. We secretly chuckle to ourselves when they fall upon uncomfortable times.

So now everybody who wants to know how much corporate executives earn can read all about it in the newspaper every morning: "Britain’s top bosses have continued to enjoy generous pay rises despite greater scrutiny of executive rewards"! 

​Now, if you are not one of Britain's top bosses you might be wondering what this shocking revelation has to do with you and what difference other people's pay rises will make to your own actual life. Well, the hope in bombarding us with all this information about other people's wages is that we will get cross and demand that something ought to be done. That illegal immigrant, recently arrived on a leaky boat from across the sea whence he had to be extricated by the Italian coastguard when the boat duly capsized, is now safe in England reading every day about all the fat cats who are paid too much. He will soon be convinced that the only reason his own life sucks is because of those overpaid executives. If only those executives were not paid too much, life would be great for everyone. Faced with that revelation, the only thing the newbie can do with these insights is to demand more fairness and more justice, and of course less inequality.

​Public disclosure effectively ensures that executive contracts in publicly held corporations are not a private matter between employers and employees but are rather influenced by the media, labor unions, and by political forces operating inside and outside companies. These “uninvited guests” to the bargaining table have no real stake in the companies being managed and no real interest in seeing companies managed well so they serve all the claimants on the firm including consumers, debt and equity holders, employees and communities. [Yet] these third parties have affected both the level and structure of executive pay through tax policies, accounting rules, direct regulation, and other rules and regulations stretching back nearly a century.

Kevin J. Murphy, ‘Executive Compensation: Where We Are, and How We Got There’

And rightly so! Disclosure rules help everyone to understand that pay is not a private matter between employer and employee. Pay disclosure therefore has so much potential to produce justice and fairness by bringing everybody with an opinion to the bargaining table. Everybody with an opinion is welcome to express it! It's a matter of free speech. How else would we know whether the pay is fair? In a modern democracy, we first have to hear what everybody thinks about the matter. It is true that bargaining is costly, but the price is worth paying (or rather, the price is worth charging to the company) because it will lead to fair and just outcomes.

But let’s look at what happened to levels of executive pay after disclosure rules became established. Oh dear. I’m afraid it’s not all good news. This is called market realities.

There is little evidence that enhanced disclosure leads to reductions in objectionable practices: for example, perquisites increased as executives learned what was common at other firms, and options exploded following the [enhanced option grant disclosures in the] 1993 rules.

​Kevin J. Murphy, ‘Executive Compensation: Where We Are, and How We Got There’
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It seems that when human beings find out what other people are earning, they react very unpredictably. The regulatory idea is to name and shame, but the ‘shame’ bit of the formula doesn’t seem to work as expected. What happens is something like ‘I can't believe Snooks is earning so much...I demand the same pay he's on!’ 

Thus executive pay continues inexorably to rise despite ever more intrusive disclosure rules. But let’s not be unduly concerned. Disclosure rules are definitely a good idea regardless of whether or not they work, because at least they provide talking points for everyone to voice their opinion. Voicing an opinion on other people's pay is a human right. Also, if disclosure rules don't work it just means there are too few rules and that can easily be fixed by passing more laws to introduce more rules. There's no limit to how much regulation we can introduce! More laws, more strictly enforced, is the simple solution to fix rules that don't work.

Meanwhile, the framework of disclosure rules will encourage everyone to be very concerned about what other people are earning. Nothing to do with being nosy: anything that touches upon income inequality in Society is everybody’s business, and that’s all there is to it really. After disclosing executive pay we should have rules disclosing what all the men earn, so that women can check whether that is fair. After that, disclose pay by neighbourhood, so we can see whether the neighbours are unfairly earning more that we are. The possibilities for disclosure rules are endless. Soon we'll be able to forge the equal and fair society that we all want.

If you're starting to quibble and worrying about things like 'privacy' etc, then what kind of human being are you? You cannot just turn a blind eye to all the suffering people around you who don't have as much money as Bill Gates! The inequality is shocking! That's something like 99.999% of the world suffering these intolerable conditions in which they are not billionaires and have no hope of ever achieving that status! So it's actually our moral duty to find out exactly what others are earning and to be very bothered about it. Other people's wealth is our personal business, and if there is any morality and community spirit left in us we should bring them down to a level where we can all be equal. Equally poor, it is true, but equal just the same.