After executive pay, where next for shareholder activism?

30th April 2012

Board baiting is set to become the new growth sport. But unlike bear baiting, pig sticking, and fox hunting, it's legal. It pits executives who want to maximise pay against investors who need to maximise dividends.

There's a new online campaign so that smaller investors – especially those whose money is held indirectly by pension or other fund managers – can join in. And while all the current energy is directed to the remuneration issue, bubbling under are other concerns such as the effectiveness of executive directors, the value for money (or otherwise) of non-executives, as well as the future progress of the company in which they hold a stake.

Insurer pay policy under fire

Insurance group Aviva is the latest boardroom head to feel the investor heat. Chief executive Andrew Moss has decided not take a 4.6 per cent base salary increase which would have tipped his guaranteed earnings over the £1m mark. But he also received a £1.15m bonus in the last financial year.

Moss and Aviva are in good company. Over the past week or so, investor pay pressure has been pre-dominant at Citigroup, Credit Suisse and at Barclays where some 27 per cent of shareholders voted against the pay package of chief executive Bob Diamond and others as a protest against performance and dividend levels. 

The Barclays figure is not a majority – even counting those who abstained on the issue – but it is a far cry from the handful of investors who used to complain. Many boards see any issue which attracts at least 10 per cent as an amber light – more than 20 per cent is a definite red hand. At US bank Citigroup, only a minority 45 per cent supported the board's pay stance.

Aviva acknowledges investor pressure. Scott Wheway, chairman of Aviva's remuneration committee, said: "We take the views of our shareholders very seriously. I am disappointed that we haven't done that as well as we should have on this occasion.

"A number of shareholders have indicated that they would like to see a different approach to the way we compensate senior directors on recruitment and an even closer correlation between our pay packages and shareholder returns. Having listened to them, we have sought to address their concerns and will continue to engage with them on this matter."

New way to chivvy managers

But how far do these institutional votes reflect the views of the ultimate owner of those assets – the investors in pension and other funds?  There has been little mechanism for the regular investor in retirement funds to tell the managers how they feel.

Now the Fair Pensions website offers that opportunity. It enables owners of units to email fund managers with their concerns, giving a template letter which says: 

I am writing about the problem of high pay and bonuses at companies in my fund. I urge you to vote against excessive executive remuneration and rewards for failure this year. In particular, I would like you to ensure that the voting rights are used to oppose remuneration proposals that:

  •  have single performance criteria in executives' incentive plans;

  •  include a transaction related bonus or 'Golden Hello';

  •  have moved the performance goal-posts on executives' incentive plans; and/or

  •  provide for variable pay which is more than 200% of executives' base salaries'

 Please let me know some time later this year how the fund's votes have been cast at companies where any one or more of these poor practices have featured in a company's remuneration report.

This is a general approach – it will become more effective as investors use social and other media to concentrate fire on particular companies and individual fund managers.

The Fair Pensions site grew out of a university campaign set up in the late 1990s to tranform the investment policy of the University Superannuation Scheme (USS).

At the time, the USS was the 3rd largest occupational fund in the UK.  As a result of the campaign, the USS "formally adopted a socially responsible and sustainable investment policy, taking the crucial step of hiring staff to ensure the policy was properly enacted."

But according to consultancy PIRC, many investors using the Fair Pensions or other approaches may not receive a clear (or any) answer.

Asset managers reluctant to disclose

The Financial Times reports PIRC research that shows that only around 15 per cent of asset managers tell underlying investors how they vote on pay and other issues.

This is in spite of a "comply or explain" requirement to do so under the UK Stewardship Code. The PIRC figures show just 27 out of the 175 asset managers who acknowledge the code provide a complete voting record with only a further 50 providing some details.

In the latter group, some only reveal votes against or absentions – little help to ultimate investors who are unlikely to know all the stocks the fund holds.

This leaves more than half who either ignore requests or "explain" they do not disclose for "confidentiality" reasons. Some smaller asset managers privately say they do not have the resources to comply with investor requests – an argument that PIRC rejects.

It says: "It is not an onerous task for any asset manager, regardless of size, as it just takes a few hours. Investors are free to choose how frequently they wish to disclose voting information, with some reporting quarterly and others monthly or annually," he says.

US auditors under attack

In the US, mutual funds must publicly disclose their voting records – a requirement likely to be extended to other asset managers.

After pay, a contentious issue could be auditor selection which has become a hot issue in the US where regulators are considering ways to make auditors more independent of companies and more sceptical when checking their financial statements. Auditors have to tread a tightrope – they represent the needs of investors by verifying the figures yet they are appointed by directors who agree their remuneration level.

Unions have been trying to get auditor rotation put to a shareholder vote at Alcoa, Deere & Co, Walt Disney and other companies, though the Securities and Exchange Commission has ruled that auditor selection is "ordinary business" that does not have to be put to a shareholder vote. Auditor inaction was widely blamed for the Enron debacle a decade ago.

Salaries are top of the investor hit list

But for now, the pay issue is overwhelming – uniting popular feeling with investors' dividend requirements.

In a Mindlful Money blog, Ecclesiastical's Neville White says:

"Our own view is that tri-partite action is needed to simplify reporting, quantify the expected face value cash number attached to any package, and to justify the amounts awarded."

"These three areas are currently wanting; bulky remuneration reports have not provided clarity, and moreover, have not allowed investors to understand the expected face value of annual remuneration packages at a glance. And seldom, do they justify the amounts paid except by quoting ‘the market'. As an investor, I want to understand why bonus opportunity needs to increase from 20
0% to 250% salary per annum, and how directors are better motivated by paying the additional opportunity; the same applies to why incentives are routinely paid, but never justified, for meeting only target performance."

 

More on Mindful Money

Executive pay: Are we looking at the wrong numbers?

Citi’s CEO pay revolt: capitalism is back, baby!

Executive Pay – Simplify – Quantify – Justify

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