This year provided the perfect storm for a shareholder ‘spring’ as executive pay continued to soar, often despite poor performance, while a cultural shift in British society, politics and media increasingly targeted ‘fat cats’ as austerity measures continued to bite.
“The challenge will be to ensure the commitment to engagement and stewardship demonstrated during the spring is sustained in the long term.”
Daniel Summerfield
Asset owners and managers have certainly made their feelings felt, but does this shareholder spring really have long-term legs? Will an eventual economic recovery bring with it a relapse of investor inertia? Could the increasing globalisation of asset ownership undermine British institutions’ influence on local companies?
Flaying the fat cats
There can be little doubt executive pay has ballooned out of control. The average FTSE 100 director enjoyed a near-50% pay increase in the year to April 2011, a similar scale to the previous year. The vast majority of those increases have been in bonuses or other variable pay, which would usually be linked to performance. But where is the performance for investors?
David Lis, head of equities at Aviva Investors says: “We don’t mind executives earning huge amounts of money if they deliver huge amounts for our clients. That is how capitalism works. What irks us most is that executives continue to get pay increases when investors have lost half their capital and there are many cases like that.”
The stratospheric increase in executive pay in an environment of economic downturn and lacklustre performance fed into a perfect storm for a shareholder spring, bolstered by the UK Government’s warnings that investors were expected to address the problem. Meanwhile, the media drove the disquiet in British society about excessive pay ever higher with bankers in particular often making headline news, being stripped of bonuses and titles. Much of the recent shareholder activity has focused on executive pay. According to Tom Powdrill, head of communications at PIRC, an advisory firm for institutional investors on governance and CSR: “There has been an incontestable increase in shareholders’ opposition to executive remuneration. This year has seen a record number of six defeats of remuneration reports. The average vote against also rose to around 8% this year versus 6% last year.”
However, does the focus on pay, particularly where it is out of step with performance, mean investors will ease off once the balance returns more towards normal? Revulsion and revolt on excessive pay is not a new phenomenon after all.
The term ‘fat cats’ first emerged in the 1920s and has since been chanted at wealthy individuals every time economic downturn hit and society no longer deemed it acceptable to earn such rich rewards while others faced cutbacks and falling real pay rates. Former Disney chief executive, Michael Eisner received more than $737m in compensation over five years in the late 1990s despite the company’s five-year net income shrinking 3.1% on average each year. In 2003, GlaxoSmithKline suffered a then-historic defeat of its remuneration report, which awarded chief executive Jean-Paul Garnier a £22m ‘golden parachute’.
One senior union representative said at the time: “Corporate greed will never have the same free reign.” While Bob Diamond and WPP’s Martin Sorrell might agree, the average pay rises enjoyed by FTSE 100 executives remain vastly out of step with both performance and average pay levels.
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