What's Stockholm got to do with executive pay - a lot

In psychology, the Stockholm syndrome is a disturbing condition first defined in 1973, after four employees of a branch of Kreditbanken in the Swedish capital were taken hostage by armed criminals.

Firing his machine gun in the air, escaped prisoner Jan-Erik Olsson announced: “The party has just begun!” Some party. The hostages were bound, strapped with dynamite and held in a bank vault for five days, when they were freed.

The weird aspect of the affair was that the hostages ended up being antagonistic to their rescuers and defended the arguments of their captors. A female hostage even became engaged to one of them. This reaction is not uncommon. The FBI’s database suggests that 27% of hostages display some sympathy towards their captors.

On a broader level, the victims of family abuse go out of their way to excuse the actions of predators and criminals.

The syndrome, in effect, is a survival mechanism. Even when the victims see something wrong is happening, they curry favour with the very people who are harming them, in the hope of surviving the encounter. When abusers favour them with occasional kindness, victims are even more likely to take their side.

Individuals presented with opposing points of view also tend to believe the one that makes them feel most comfortable, even if this is illogical. This process is known as cognitive dissonance. For example, when a drinker is presented with data suggesting alcohol consumption will damage his health he is more likely to find fault with the data than go on the wagon.

Behaviour like this dates back to thousands of years, when human beings spent their life hunting and gathering. Survival was about finding food and (crucially) feeling comfortable enough to bring up children. If captured by a tribe, individuals would initially make a fuss, but settle down quickly. Procreation would depend on it.

We can, of course, use the power of logic to reason our way out of paradoxical situations. But this process takes a lot of time or energy. When we are rushed, tired, distracted or disinterested we opt for the comfortable life.

In a book called Willful Blindness, published last year, Margaret Heffernan argued that people are willing to tolerate any amount of bad behaviour as a result of their conditioning.

During the credit boom, for example, traders behaved like members of a tribe rather than stewards of a bank.

Heffernan quotes former Lehman trader Brad Ruderman: “The self-satisfaction of knowing what you had accomplished monetarily but also intellectually and that you had joined a club, a group of people seen as the best and the brightest – that was something money can’t buy.”

But the senior executives who paid such people large sums to carry out actions which put their banks at risk were victims to Stockholm syndrome. They were supposed to be in charge of the traders, but the traders ended up in charge of them.

And don’t just pick on bankers. The owners of listed companies have been outsmarted by their chief executives time and again.

This is because, as soon as they win power, chief executives want to keep it. They resent oversight, and disarm their owners through a mixture of bluff and charm. Shareholders are played off against each other, desperately competing for access to the chief – they are driven to produce performance, but effective corporate governance is a side show.

Shareholders find it hard to vote against generous pay deals, justified with the help of expensive remuneration consultants. They end up being taken prisoner by their managements and end up defending the ludicrous pay settlements to which they have put their name.

As a step towards getting the situation under control, UK prime minister David Cameron has said that shareholder votes against unjustified pay settlements should become binding.

But this misses the point. The owners of businesses have not been keen enough to challenge chief executives in a listed companies over the years, for the simple reason this runs contrary to human nature. It is only by being aware of this, and fighting to control the tendency, that shareholders will start to force a change. There are signs this process has begun, but prime ministerial sound-bites will matter little in the scheme of things.