Evidence at Pearson for management hi-jack at the expense of shareholders

News of a shareholder revolt at Pearson over chief executive pay illustrates the Escondido Framework analysis of the company as an entity owned by no-one, but open to hi-jack by the management.

Pearson’s shareholders have struck out at the company’s and its remuneration committee by voting down the proposed 20% pay increase to chief executive John Fallon after he presided over record £2.5 billion loss for the group last year. Meanwhile, employees are laid off and the returns to shareholders are in freefall. The comment of the company, that it was “disappointed” by the vote but that the pay increase goes ahead, supports the underlying Escondido Framework thesis of management capture.

“Naturally, we acknowledge this feedback and thank those shareholders who have already spoken with us,” the company said. “The remuneration committee is committed to continuing dialogue with our shareholders to help shape the implementation of our remuneration policy going forward.

“Mr Fallon said his £1.5m payout in 2016 was a matter for Pearson’s board and its remuneration committee, but added he had used his £343,000 bonus, net of tax, to buy shares in the company on Friday morning.”

The FT notes that the vote at Pearson was the biggest investor revolt against executive pay at a major UK company so far this season, with the next nearest being a 40 per cent vote against the remuneration report at AstraZeneca. FTSE 250 housebuilder Crest Nicholson is the only other large listed UK company to have suffered a defeat on pay this season, with 58 per cent of votes cast against its pay report.

It can only be regarded as good news that the FT further reports that other FTSE 100 companies that faced pay protests last year, including BP and Reckitt Benckiser, have cut remuneration packages in an effort to avoid similar difficulties at their shareholder meetings this year – and indeed make an effort to reposition the companies against the market interface with their investors.