Alarm bells should be ringing. How can it be that, despite the shareholder uprising of 2012, UK plc finds it acceptable (and possible) to continue to handsomely reward executives that are clearly failing to deliver rewards to shareholders on a similar scale? What is going wrong with shareholder engagement that affords these companies the flexibility to continue to behave in a manner that is offensive to many of their ultimate owners? Can any one person really be worth £70.4m?
THE LITMUS TEST
Although executive pay is just one part of the governance and engagement process involved in investing capital in UK plc, pay is what Doborah Gilshan, head of sustainable ownership at RPMI Railpen, calls “a window into the boardroom” and tells shareholders a lot about the dynamics between senior executives such as the CEO and the board.
Back in 2009, in a paper produced by Railpen and PIRC, Sir Adrian Cadbury said the vote on pay was a “litmus test of how far boards are in touch with the expectations of their investors”.
According to Gilshan: “The level of dissent being recorded at UK companies on pay votes, where some votes have failed, demonstrate that some boards are not in touch with the expectations of their shareholders.”
Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management (RLAM), says of this year’s uprising: “Boards have misread the mood of investors around performance.”
Yet the UK is widely recognised as one of the most ‘engaged’ markets globally and the wave of shareholders voting against pay proposals in 2012 and in the years since – this year looks set to be another bumper one for shareholder rebellion – is evidence shareholders are at least trying to make their expectations known. How then are we back in the same boat four years later?
IS ENGAGEMENT FAILING?
Stefan Stern, director at the High Pay Centre, says the current round of pay packages should “raise an eyebrow” about engagement as the size of packages “makes you wonder how effective engagement is”.
He also argues the implication that one person can be so critical to the decision making process at a firm goes against a core principle of good governance – that big decisions should be decided at board level rather than by a single individual.
“Excessive pay is a mismatch to this,” he says, adding: “It is naïve to think a CEO could single-handedly change the direction of a big company.”
According to Sally Bridgeland, a pensions industry veteran and member of the 300 Club, the resurgence of the shareholder rebellion is more a sign things are shifting, and shareholders and boards are establishing a “healthier balance of power”.
“In previous years both rebellions and engagement have focused on contentious issues more than governance – in governance the focus is whether the board is employing the right executives first and foremost (and rewarding them correctly second),” she says. “It feels like the start of the move away from using the peer group benchmark to measure UK pension funds’ investment performance. Investors feel uncomfortable, but they are only now beginning to feel brave enough to step away from the herd.”
2012 was a “remarkable” year in terms of shareholder voting, as Dr Hans-Christoph Hirt, co-head of Hermes EOS, describes it, and it did bring about a change in the law.
