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Janette Rutterford: Well Evan, let’s talk about chief executives. You’ve done quite a few series of The Bottom Line interviewing a range of chief executives; have you noticed any particular characteristics that make somebody a chief executive?

Evan Davis: No, and I think it’s interesting that I haven’t. I mean, I think they come in all shapes, sizes, nationalities and genders, and what you notice about them is that they are perhaps more human being than the public mostly appreciate. They have different preoccupations, when you get them off the business side, sometimes even chatting to them beforehand or afterwards, you find some read books, some are literary, some are not, some go to movies, most play with their kids if they have kids, I mean they are an incredibly ordinary bunch of people in most respects.

The one thing I think that does stick out is that they tend to work very hard. I think they do work very long hours, and the difference between a chief executive life and that of most of the people who are working for them is, I think, the lack of a boundary between the working life and the personal life. So I think they do work hard, I think they take their work home with them, I think they don’t really draw that distinction between the two lives they have, but otherwise they’re just remarkably like other people.

Janette: But isn’t that going to make a difference for men versus women, because women tend to have more responsibilities at home so they’re less able to devote their entire life to a CEO job?

Evan: That is undoubtedly true and, if you observe the range of people who are CEOs, women are substantially less than 50%, you know, very, very many less than 50%, so there are things there, and there are, I think, styles that correlate slightly with the genders. I think it is true that you find, I think it is true that you perhaps find that women have a slightly different management approach, a slightly different management style and are probably disproportionately, if you like, more consensual in their management style than the men. Now, I mean, that could be the case.

Janette: But given that emphasis for leadership, isn’t that a disadvantage, that CEOs essentially lead?

Evan: Well I don’t know, it can be a disadvantage but it can be an advantage as what you’d probably expect to find is that women gravitate towards the kinds of companies where consensual leadership is a more useful thing than the sort of testosterone-fuelled macho culture.

Janette: Such as...?

Evan: Well, I think there are a lot of human service companies where that is a more useful attribute. There are other companies you might think of driving a sales force, for example, where you’ve got to fire people up and motivate them and force them to do the work, otherwise it’s not going to be done as well as it otherwise might where the sort of traditional male attributes work, but I think it’s quite possible that we exaggerate these differences between men and women, and quite possible that we’re so pre-fixed in what we’re expecting people to be that we see it in them without it actually being the case.

But, assuming that it is the case that women are slightly disproportionately more consensual in their management style, I think what you would expect to see is just women being in certain industries, slightly more than they are in other sorts of industries, because we notice that elsewhere in the labour market. We notice that, I think you will find more women in the Civil Service than you will in manufacturing industry. I mean, I think you find more women in social work and nursing than you do in truck driving and these things.

Janette: You don’t find many women, there are more women accountants for example, but you don’t find women leading accounting firms very much.

Evan: No, that is true, that is true.

Janette: What about cultural differences, so British CEOs versus European CEOs versus American?

Evan: I think we can look too hard for these things and I don’t think it’s easy to find systematic differences between the different nationalities of CEO we’ve come across, and it’s too easy to think that there would be these things. Always when you have different population groups, men / women, British / non-British, an important question to ask yourself is what is the sort of deviation within the group and what is the deviation across the group, and if globalisation teaches us anything it’s an awareness that deviations within cultures are often bigger than the deviations across cultures.

That’s what globalisation has told us, it’s that people who like sport have more in common with each other in many respects, if you think of the jocks, the classic jocks, a British jock and an American one are more similar than the British sporty type and the British theatre type, whereas the British theatre type and the American theatre type are probably pretty similar, and so you need to look at the sort of standard deviation within the sample and the standard deviation across samples and ask yourself, “is the standard deviation really bigger within sample than across,” and when it comes to chief executives I think it is.

Janette: Well, let’s move on to chief executive pay. Do you think that in recent times there’s been more talking about it, that there’s a sort of awareness that there’s a big split between the top paid and the bottom paid in the economy, in the UK and elsewhere? Do you think this a modern phenomenon?

Evan: Well, I think it is there has clearly been an enormous change in the way the world has worked in the last two decades and it has seen executive pay hugely rise compared to everyone else’s pay - the rise of a, if you like, a super-paid elite - and so it is not surprising that it is more talked about. It was very much talked about in the ’90s, it has taken off since the ’90s and is now much more talked about, and I think talked about much more seriously as an issue. Now, the precise reason why executive pay has gone up so much is not entirely explained. Just to measure how much it is, we were getting excited about the chief executive of British Gas in the mid-’90s.

Janette: I remember that.

Evan: The current chief executive of the same company I think, and this is, don’t quote me on these figures but I think you won’t find it far short of ten times what the chief executive was getting when we were making a big fuss about it in the ’90s, so there is a very big change. Now, defenders of executive pay I think would say that there’s a more global market in executives so, if you like, the choices open to executives are more, are wider.

If you’re a good chief executive you can max out your earning capability and you can be more productive worldwide because instead of just being able to run the supermarket in your local town you can now run multinational corporations that are all over the world, and that might explain – might explain, I’m personally a bit sceptical about this – but it might explain why the very, very top, the ones who are really going to be running multinational companies have pulled away from everybody else, and it might explain why the top soccer players have pulled away from the mediocre soccer players, and why the top lawyers have pulled away from the mediocre lawyers. It could be that globalisation has done that. It means if you’re really top you can, the world is your oyster and you can now be, have a bigger domain and thus get paid more; but, of course, there are other theories that I think are less benign, if you like, in explaining how this has happened.

Janette: Well, there’s also the short termism argument, which is that people get paid bonuses for this year’s performance but actually by the time they’ve moved on to this other green pastures of another CEO job, you know, the company loses money.

Evan: That’s the theory, it’s that the remuneration system is distorted and simply rewards them for short term behaviour. I think an even more powerful explanation might lie, might lie in, I think of it as a collective action problem. You’ve got a million shareholders, say, and you’ve got one chief executive, or a chief executive and a board of a dozen people. That board of a dozen people can steal money from the shareholders - it’s always the shareholders’ money we’re talking about here incidentally - the board can steal money from the shareholders and as long as it doesn’t steal very much and it doesn’t do it an egregiously illegal way, so it isn’t corruption or fraud or theft, it is stealing the shareholders’ money but in a kind of innocently fraudulent way, and as long as they don’t steal too much there’s no point in any one shareholder getting terribly excited about it because their individual stake in the half a million pounds or half a million dollars that’s been taken is so small it’s not worth them making a fuss about it.

So it’s a way, it’s that if you had one shareholder the shareholder would tell the chief executive, slap them on the hand and say no, you’re going to get paid less but if you have, you know, a million shareholders you can get away with taking a bit before anyone raises a fuss.

Janette: I mean you could argue at annual general meetings, I mean are more people going to annual general meetings now do you think?

Evan: Well, I mean even if they are, it’s quite hard to make a fuss. I don’t think they are, I think it comes in waves doesn’t it, but the other thing is of course that chief executive pay is now much more public and very disclosed, and of course we think that’s great and that’s transparency and that holds them to account. It does have the opposite effect as well; disclosure can cause inflation and it might be that the disclosure itself has allowed them to be paid more, because if every remuneration committee sitting on every board working out how much the boss should be paid is saying we want our boss to be paid 1% more than average - perfectly reasonable thing, they expect their boss to be better than average, they want their boss to be paid 1% better than average, and everybody else’s pay is published, you will have the most inflationary thing occurring because everyone will be trying to be 1% better than average and you will just see it shoot through the roof, and that is potentially what has happened.

So we’ve had three explanations; the disclosure, the collective action or agency problem of multiple shareholders and one chief executive, or the globalisation theories, you know. I mean there are a lot of different reasons as to why executive pay might have gone up.

Janette: But one of the interesting pieces of research is that people - they’ve just done some work I think with the Rowntree Foundation - that people actually think that people who earn a lot of money deserve it, that even if I earn the median salary of £20,000-odd I believe that a CEO who’s earning millions is somehow worth it. I mean, do you think that’s odd as a perception?

Evan: I think it’s a little odd because I think it’s hard to dismiss the theories that remuneration systems are somewhat distorted, and with that it all comes out of the most benign forces of demand and supply, and global demand and global supply, I think it’s hard to think that everybody deserves what they get. I mean I think it’s a, I think there’s probably just an innate conservatism among people, that there’s a sort of sense of if that’s how it is that...

Janette: It must be right.

Evan: It must be to some extent right, and undoubtedly there are cases where it is right, so I mean you can’t question it, say it’s always wrong but it’s, you know, it would be I think a brave person who said it’s always right, and we know, I think we now know, and few would argue, that where the banking system was involved it was wrong.

Janette: What was special about the banking sector, do you think?

Evan: Well, I think what was special about the banking sector was that there were extraordinary profits being made so it seemed normal to pay very large amounts to those who’d been involved in the creation of those profits, and the distortion there, the one that you mentioned, is that those profits were not sustainable profits. They hadn’t reinvented banking, they hadn’t stumbled across anything, all they’d done was enjoy a particularly inflated boom that was followed by a particularly disastrous crash, and so it’s certainly very important.

Janette: But in a sense, I mean wasn’t the whole problem to do with borrowing? So, in other words, I can ratchet up my profit growth by borrowing a load of money, so that was particularly true of banking.

Evan: Yes, I can turn a 10% return into a 100% return...

Janette: Exactly, by borrowing.

Evan: ...by maxing it out by borrowing against it.

Janette: And that’s not changed.

Evan: And that’s dangerous.

Janette: But nobody’s changed the way people are going to be paid, they’re still going to be paid on share price growth so it’s still in my, it’s still worth it for me to borrow money to do that.

Evan: Indeed so, that is potentially a problem. The only thing that I think has been suggested, which I think is important, is that the remuneration should not come in the form of cash now that is not in any way, in any way, in no way reflects the performance of the company over the period after the actions are taken. In other words, I shouldn’t pay you now on the basis of what you’ve done today, I should wait and see what you’ve done today and how it works and how it affects the company, and I have seen that as one of the things that people think needs to be taken into account.

Janette: I mean, that happens when big companies buy little companies, they tend to say we’re not going to pay you the full amount, we’re going to wait to see if the profits you said were true are true.

Evan: And that makes absolute sense, and I mean I think it’s hard to argue with it, and I don’t see many people arguing with it, it’s just about making it practical, you know, you’ve got all sorts of difficulties haven’t you, that people leave the company, can you really, if they spend the money can you go back and get it if it turns out they should never have got it?

Janette: The problem is that because CEOs earn so much money they can afford to buy the best lawyers.

Evan: I mean, there is a bit of that, but I mean I, you know, the truth is a lot of this is culture and - I mean I’m a believer in economic arguments but occasionally you have to know, you just have to spot that there’s a culture in which people behave in a certain way and things seem acceptable at one point which wouldn’t be acceptable at another point, and I think the culture is in the midst of change. It hasn’t fully changed yet but I do feel that the culture is changing.