Uploaded - 25th November 1996 (Modified version uploaded: 16th December 1997)
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David J Murray
Newspaper headlines frequently scream: "XYZ Company Chief Executive to get another £1million" - "Privatised utility to pay big director bonuses after 5,000 have lost their jobs" - "Service quality drops but bosses get rich" - "Directors to get fat payouts even when performance is below median."
It is easy to write a sensational headline. But what are the realities behind the stories? Are top people getting obscenely rich at the expense of others? What are the moral principles to be considered? Does the Christian church, does the Bible have anything to say to these stories of alleged materialistic greed? We don't have time to explore all of these questions in depth this morning, and I'm certainly not going to attempt to leave you with a nice neat formula by which to calculate what top managers should be paid. I shall, however, attempt two things - firstly, to put some of the debate into context in an attempt to moderate the sensationalism (and this part I suppose is in defence of high pay) but secondly, to issue a number of challenges to those who either receive or influence the determination of high financial rewards. Along the way I shall refer to what seems to me to be relevant Biblical material.
Having already been introduced by our chairman I don't need to go into great detail about my pedigree. Let me emphasise, however, that I do not come to this subject as an opponent of the business world. I have lived and worked within it for most of my life and owe a great deal to many businesses, both those by which I have been employed and those in which I have worked, and still do work, as an adviser. To any who are here hoping to hear an attack on modern business, I must ask that if I disappoint you by defending the business world in some respects please be assured that it is only after thoughtful consideration of its functioning across many sectors and in many countries over many years. To any who hope to hear a justification of the status quo, and who will be equally disappointed, let me assure you that if at times I criticise and challenge it is out of concern as a friend, indeed as a member of the family, not out of envy or of destructive hostility from an outsider - but criticise I must!
2. DIFFERENTIALS
2(a) In Defence of Differentials
Let me commence by appealing for a sense of proportion. It is generally accepted that on promotion from the shop floor to a supervisory position a person will get something of a pay rise. On progressing to a junior management role, and then into the senior ranks, as one's range and level of responsibility, increases, more reward can reasonably be expected. On becoming managing director, and let us assume a business of say 500 people, the reward package can be expected to increase yet again. This is generally accepted as reasonable by all but a very small minority of egalitarians in our society. Why?
The arguments usually take account of such factors as:
Once upon a day it was arguable that enormous apparent differentials were necessary in order to give any noticeable real differential, due to penal levels of taxation on high earnings. This, however, is no longer a valid argument. So what can justify such high figures?
I said that I wanted to appeal to a sense of proportion. With few exceptions such figures are only found in extremely large organisations. Remember, we were considering a company of 500 people. But suppose that this company is a member of the UK sector of an international corporation. There's another differential to apply on top of the company M.D., and then probably a European head, and then a global product division head, and then the Chief Executive of the entire company. At each level additional complexity is added, and further weight of accountability placed upon the shoulders of the top jobholder. By this time we might have arrived at 40,000 people spread across ten product divisions in forty countries.
These are jobs which very few men or women are capable even of beginning to comprehend, still less to take on successfully. The rare individuals who can carry such weight, and do so with any degree of success, surely are worthy of very high reward. People in the media should both be better educated and be more devoted to balanced, fair reporting than to fall foul of the temptation to create circulation-boosting headlines which pander to the jealousies which already divide our society, even implying that large numbers of top jobs carry massive rewards.
I often think of the soliloquy written by Shakespeare into the mouth of Henry V. Moving incognito around the tents of his army the night before the battle of Agincourt he hears his troops talking about their situation and their commanders, and he joins in the debate. As he leaves them, agonising about the leadership decisions he will have to take in the morning, he discusses with himself the loneliness of top leadership:
"... Upon the king; ..... What infinite heart's-ease must kings neglect that private men enjoy! ..... The sword, the mace, the crown imperial, ... not all of these, laid in bed majestical, can sleep so soundly as the wretched slave who, with a body fill'd and vacant mind, gets him to rest, ... (and as) a member of the country's peace, enjoys it; but in gross brain little wots what watch the king keeps to maintain the peace whose hours the peasant best advantages." (Henry V, Act IV, Scene I).
Of course, the elitist language would be different today, but can we in all honesty claim that, even in a more educated society, the role and burden of top leadership is much better understood by the population as a whole? I think not. Top leadership is an exceptionally lonely business. It deserves exceptionally high reward.
2(b) ... But Now, a Challenge to Greed
But now, just in case you feel that I'm about to use Shakespeare as a witness for the defence of massive differentials for top people, let me turn you to an interesting Bible passage. It is in the Old Testament (Deuteronomy 17:14-20, NIV) and is a law about the behaviour of kings. We are told that the king, "must not acquire great numbers of horses for himself, ... must not take many wives, ... must not accumulate large amounts of silver and gold, ... (and must) not consider himself better than his brothers and turn from the law." I find it fascinating that even three thousand years ago there was a similar concern about differentials in power, status, possessions and privileges. The king was not to fall prey to the temptation to set himself too far apart from the people; he must remember that they are his brothers.
(Incidentally, although there is no evidence that this was actually carried out in subsequent practice, there was also a clause to the effect that during the coronation ceremony the king must personally write out on a scroll his own copy of this law, carry it with him, and read it every day of his life. I wonder whether that could be applied to modern business by requiring every Chief Executive personally to copy out their corporate philosophy and code of conduct, and to read it every morning?)
There are other passages of the Bible relevant to this topic. It contains repeated calls to unselfishness, and condemnations of materialistic greed. Nowhere is wealth in and of itself condemned, but the "Love of money" is said to be the genesis of every kind of evil.
Whilst great men and women are praised as individuals we are reminded repeatedly of the interdependence of people, even to the extent that the church is not in the New Testament described as an institution but as a body in which each organ plays its different part, without which the whole could not fully function. No one part is to be allowed to see itself as greatly superior to the rest, but rather to appreciate its reliance on others.
We are reminded that Christ came to change the lives of those who follow Him, applying the power of His resurrection to that process of moral and spiritual transformation. His followers are called to become like Him, one aspect of this being to give more thought to the needs of others than to gratifying our own desires. "Even Christ did not please Himself." He voluntarily came as a servant to his people, not as a domineering master. We are also reminded that it is more blessed to give than to receive.
Yet, we are also told that, "The labourer is worthy of his hire," and Jesus in His parables appears to give support to the concept of differential reward, especially for differential performance - which leads me nicely into my next point.
3. PERFORMANCE
3(a) Rewarding Performance - Yes, but what are the Criteria?
We are often told that the high pay of top executives is justified not only by the pressures of their jobs but also by their business performance. There is, of course, the thorny question of bonuses paid even to directors whose companies are below the median in performance for their industry, presumably because the standards were set some time ago without allowing for the impact of economic upturn. However, I'd like to leave that on one side and to spend the remainder of my time challenging the criteria used in assessing performance. As I said at the outset, I issue these challenges as a friend, but they are meant as challenges nonetheless.
For too long the business world has given excessive priority to a single stakeholder (the financial "owner" of the business) and to a single measuring instrument (money). I want to return to that in a moment but first to raise a related question. Too often, it appears to me, in the drive for achievement of numerical targets (usually expressed in money terms) little attention is paid to questions of how the results have been achieved.
I remember some years ago challenging a managing director by saying that I would start to believe his high-sounding words about corporate culture when he demonstrated its reality by refusing to pay a discretionary bonus to someone who had achieved his numerical targets by means which were inconsistent with the declared values of the organisation. I'm no longer close to that business but have little or no reason to believe that the challenge was accepted. Maybe it will eventually be picked up seriously by the remuneration committees of some boards as they consider top pay.
Let me illustrate. How often are members of the top team rewarded for the efforts exerted by the much maligned and ignored people in the middle layers? These people in the middle are those described in the title of a recent book by some McKinsey consultants as the " Real Change Leaders", but are they the people who get the big rewards? Rarely.
Then again, I often hear thrusting young managers, bred on the 1980s philosophy of self-interest, talk of the essential priority of shareholder value and of urgent profit maximisation with little or no concern expressed for the welfare of those hurt in the process of doctrinaire downsizing, I can't help recalling the parable of the Good Samaritan. I see the priests and administrators of the high God of Short-term Money passing by on the other side as the victims robbed of prospects, dignity and self-worth lie bleeding. But there's a difference; in the Biblical parable the passers-by were indifferent and uninvolved, whereas the celebrants of the cult of corporate cutbacks instigate the robbery themselves and then walk past sans conscience, sans feeling on the way to collect their performance bonuses.
Is this too harsh? One must not over-generalise. There have been, and still are, organisations which suffer from obesity and need urgently to slim down. Many have enjoyed overmuch comfort and sloth. I have myself, over the past fifteen years, worked with many companies to reassess the shape, size and balance of their organisations and have on occasions recommended reductions. Furthermore, size reduction can be (although it all-too-rarely is) carried out with consideration and care for individuals.
This is not to advocate sloppy management or failure to exercise good stewardship. It is necessary, however, to challenge the morality of people at the top of an organisation taking hundreds of thousands of pounds in bonuses whilst their former staff and middle managers line up together in employment offices, and their remaining mid-level staff work sixty-hour weeks vainly struggling to keep the ship afloat in spite of the half-competent efforts of highly-paid "re-engineering" consultants.
Measures of performance should take into account not only the numbers achieved, but how people have been treated in the course of achieving them.
2(b) What is "Business Performance" Anyway?
I said I would return to the question of stakeholders and measures of business performance. It was very good news for Britain when the RSA Inquiry into "Tomorrow's Company" adopted and promoted its "Inclusive Approach" - incorporating the concept of multiple stakeholders in a business. The idea is not new, but it needed fresh impetus. It is important that interest in the topic should not be allowed to die away. Given the way that attitudes in society are developing it surely cannot be possible for businesses to survive into the long term if they continue to worship the shareholder (or worse, the analyst) as the one true god. Society will surely withdraw its "Licence to operate" from businesses which do not behave responsibly toward a multiplicity of stakeholders.
Businesses must start to pay greater attention to the interests of local communities, customers, suppliers, the natural environment, employees, even competitors! They must either take matters in hand themselves or risk eventually being inundated by yet more armies of bureaucrats paid to enforce behaviour which companies could have imposed upon themselves to much better effect if only they'd had the foresight to do so.
Meanwhile I would like to see the remuneration committees of boards laying down pay/no-pay criteria for top bonuses which take account of the answers to questions such as:
Let me suggest an exercise for later today. Take the second of the above points, that of paying customers on time. Suppose you agree in your purchase orders to pay your suppliers in 30 days but actually take forty days, or fifty days, or even more. What would it cost your company to start paying suppliers in line with what you agreed? If you think your already are doing so, congratulations, but I still suggest that you check out the reality. What would it cost? Try deducting that from your annual profit figure this year, and calculate what impact it would have on top management bonuses. Again, if very little, congratulations. Otherwise ask, "Who really is paying the bonuses?"
Here's a second exercise. You have a no-bribery clause in your corporate code of conduct? Excellent! The United States of America has a Foreign Corrupt Practices Act, but no honest person pretends that this has eliminated bribery by big American companies! Other countries (including the U.K.) don't have anything like the same legal constraints, and bribery is alive and well in the business world, especially in overseas business dealings where it is "excused" by the fallacious claim that, "It is just part of the accepted culture over there." Are your corporate governance processes sufficiently rigorous and transparent to ensure that bribery cannot be hidden, and are you prepared to say (and mean it!) that no top management bonuses will be paid as long as corrupt business practice is tolerated within the organisation anywhere in the world?
I must close, and will do so by summarising with three statements:
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