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762   14 July 2003   

Share Options & me

The payment of staff in "shares" or favourable share-options has always spelt trouble.  I have always disliked it, although I have benefited from four or five share-option deals, over the years. Our first house-deposit came from a Bovis share-option, in Uxbridge, in 1971.

But I share the conventional TU view that such transactions are merely "funny wages", commonly deceiving shareholders that they are cost-free. There has been extensive misrepresentation, in reporting them to shareholders.  I have always cashed-in my options at the very first opportunity, and used the money to get on with life.  In psychological terms, they are patently nonsense. The whole ideology of "identifying workers with shareholder interests" is superficial clap-trap.

The practice is a spin-off from the remarkable "takeover" of all companies by their leading staff, their management. The Victorians never intended companies to be like that!  The shareholders were originally set up as the unambiguous owners, represented by a committee of owners (i.e. "Directors", constituting "the Board").  And the job of the Directors was to supervise the lower-class managers and their workers.  The "Auditor" (from which statutory role the entire accountancy profession has grown) was responsible for reporting to the shareholders each year, on how "their company" was progressing. 

What was never envisaged was that there should be a "class takeover", with Managers getting themselves onto the Board, and combining all the powers of skill with the powers of ownership.  Company law contains no check, no balance, against that elision of power, which has come to dominate modern business.   The modern "Managing Director" enjoys a concentration of power beyond anything anticipated by the original designers of the company law system.  Most auditors are dominated by "company management" - and find it difficult to make absolute, impartial reports to the shareholders.  After all, their fees depend on the favour that they curry with "the Management".

The emergence of remuneration-through-shares is the ultimate expression that that takeover.  Shareholders have in practice been powerless to resist this plundering of their companies - and the process continues, day-in day-out, in the jungle of the corporate sector. 

By way of another example of manager-exploitation, let me cite the current spat between the company Vivendi and its former CEO Jean-Marie Messier, who managed to get one other Director to sign off his severance package, agreeing "on behalf the company" to pay him £20.6m, just to go quietly, and quickly.  Neither the Board nor the shareholders had approved the settlement - it had been signed by a long-standing 20-year friend of his, Eric Licoys, who happened to be another "manager Director".  The company is now trying to unpick the deal, through the Courts - but it will be an uphill battle. This sort of scam, by manager-Directors acting in concert to plunder the companies in their charge - is commonplace.

763  14 July  2003  

The Safeway spat, about two-year notice contracts for Directors, contains an important political lesson, as does the device of "contingent compensation".  Let me go back to first principles, and explain what I mean.

Our modern law of employment - "contracts of employment" - builds upon the older traditions of "Master and Servant". Indeed, when I picked up my first law textbook in the 1950s, there were chapters still called "The law of Master and Servant".  That law was as much about status as it was about consensus - although contract law is said to rooted in consensus.

But the Courts, even in those earlier days, had to confront the task of assessing damages for "breach of contract" - when a Master instantly and wrongfully dismissed a Servant. The measure of damages was essentially the loss of wages suffered by the Servant- no more.  And that turned on deciding what "notice" the Servant would have been entitled to, if notice had been properly given. There was otherwise no concept of "wrongful dismissal" built into the law, as there is now - indeed, there was no statute law at all. The question for the Court was therefore a simple "Common Law" one - "What is the appropriate period of notice for the servant in question?" 

For the working-classes, the Courts looked simply at the periodicity of wage payments.  If wages were paid weekly, then the Judge said that one week's notice was appropriate; if monthly, then a month's notice; if quarterly, then three months' notice.  "Unpaid wages" were therefore the measure of damages for the wrong of instant dismissal without cause.

But the Courts did not apply the same test to "management", as the phenomenon of "senior status" employment developed in the 19th century. Middle managers and professionals were said to be entitled to six months' notice - and for the most senior (General Managers, and Managing Directors) the common-law period of notice came to be determined, by the Courts, at about one year.  Senior jobs, the Court reasoned could not be easily replaced, and the wronged General Manager should be given longer to find a new job.  My Swansea grandad George Cann was General Manager of a West Wales timber-yard, well before the First World War.

This doctrine was tempered by a second common-law principle, namely the mitigation of damages.  Every party wronged by a breach of contract is obliged by law to take all reasonable steps to minimize (= mitigate) the damage suffered.  In the employment context, this means trying to find a new job, to replace the old. For if a new job could be found, that would reduce the damages payable.

Much of this law has been superseded by contemporary employment practice, and new statutory provisions.  But there is a basic wisdom in this Common Law thinking. The Safeway Directors fixed up a rolling "two year" notice-period for themselves, in turbulent market conditions, and in that they were supported by their shareholders.  This was in line with 19thc judicial reasoning.  Other companies are experimenting with mitigation clauses - under which a substantial period of contractual notice is countered by the principle that compensation is reduced if the Director secures alternative employment more quickly than anticipated.

I say - that this system should apply to everyone facing the forced loss of employment, for whatever reason.  Every employee should be entitled to six months' notice, without having to work out that period. That period should be committed to job-search, and compensation should cease to payable, if comparable alternative employment were secured.  That is my idea of statutory Adjustment Pay - which builds on this old common law reasoning.

• It would bring to everyone the peace of mind which the cushioned classes have traditionally fixed up for themselves.

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