Strategy & Operations » Governance » Boardrooms’ backlash over executive pay

THE ANCIENT Romans used to appease the mob with bread and games. Like the unfortunate enemies of the Romans, City executives are being thrown to the lions to appease disgruntled shareholders who are increasingly voicing their disapproval over the size of bosses’ pay packets.

The flurry of shareholder rebellions sweeping the annual general meeting (AGM) season – occasionally dubbed the Shareholder Spring – has claimed some notable scalps. Sly Bailey of Trinity Mirror and AstraZeneca’s David Brennan were both forced to step down as irate shareholders rebelled against company pay policies.

However, worse was to come for Andrew Moss, the embattled chief executive of Aviva. The insurer faced one of the largest pay revolts in UK corporate history when 54% of its investors voted down its pay report. In particular, they objected to Moss’ £5m pay package. Days later, Moss resigned.

Other executives have survived, but they have nonetheless emerged battered and bruised from their own AGMs. Barclays suffered an embarrassing shareholder rebellion as nearly a third of its investors failed to back the bank’s pay deals for senior executives.

Tipping point
Pay packets are the main reason that the mood among shareholders has now reached a tipping point. Executive pay is increasingly seen as being out of kilter with company performance.

In the case of Trinity Mirror, investors were unhappy with Bailey’s £1.7m pay packet as well as the financial performance of the company. During her ten-year stint at the company, Bailey pocketed more than £14m while the publisher’s market capitalisation slumped from £1bn to £80m and the share price dived by more than 90%.

“Shareholders tended to take their eye off the ball on governance when the tide was rising. Now that we are in a weak economic environment, they have run out of patience when they see companies paying a lot of money when the returns are not there,” explains Tom Powdrill, spokesman for investor body Pirc.

The public mood has also contributed to the tendency. The country is struggling under the weight of spending cuts and the government’s austerity measures, while many workers have seen their wages frozen. Public anger is now being directed at the perceived excess of the so-called fat- cat executives.

According to research by Manifest, the median remuneration of a FTSE chief executive rose annually by an average 13.6% – from £1m to £4.2m – between 1999 and 2010, compared to a 1.7% average rise in the market as a whole. This does not chime well with the experience of most other workers.

Jennifer Harris, managing director of Board Intelligence, says the ongoing economic crisis has made the disparity even more acute.

“Pay is not seen as proportionate to value creation,” she says. “There is a separate issue surrounding the inequality within society. It has now become objectively distasteful.”

Political pressure
But is the ire being voiced by discontented shareholders coordinated or merely the result of coincidence? The revolts at Trinity Mirror and Aviva were very much grounded in the performance of the individual businesses, but there is also an element of mob mentality as, much like the Arab Spring from which it takes its name, the contagion spreads from company to company.

Harris says that shareholder activism has become fashionable: “Having stuck their necks out there, it has been very well received by the media. It has given others confidence and it is not necessarily because of individual event but is being used to voice dissatisfaction.”

Powdrill agrees that shareholders previously did not want to push too hard, and that they were unwilling to break from the herd. However, gripes that would have once been voiced behind closed doors are now being aired in public.

“When they see FTSE 100 companies that have lost remuneration reports, they see that it is not the end of the world when it happens. People are more confident to do it,” he says. “In the past, shareholders expressed their concerns in private and they would support the company in public. It distorted the market’s understanding of what was going on.”

However, this is not only a case of institutional investors simply discharging justice for the masses. Asset managers are also protecting their own returns, while politicians are exerting pressure on how investors discharge their responsibilities as company stewards.

Curbing the tendency
Earlier this year, business secretary Vince Cable announced a raft of proposals intended to curb excessive pay. Under the new plans, which were unveiled on 23 January, there are four central planks: improving the transparency of remuneration reports; giving shareholders a binding vote on executive pay (which will be a step up from the current advisory system); encouraging greater diversity of board directors; and finally requiring businesses to institute clawback provisions on bonuses.

One provision in particular – the publication of a single number for executives’ pay – was trailed as a major step forwards in improving the clarity of what exactly companies currently pay.

It is Cable’s proposal for a binding vote on pay that is filling executives with dread, however. If enacted, the proposal – which will require the support of 75% of investors in order for pay deals to be approved – would mean that the remuneration reports of Barclays, Xstrata and William Hill would have all failed and would have had to be re-written. As things stand at the moment, they managed to scrape through.

Powdrill says that Pirc is fully supportive of shareholders gaining a binding vote on pay. “There have been cases when companies have come close to losing an advisory vote and have then chosen to ignore it,” he says.

But not everyone thinks that Cable’s plans are such a good idea. Writing for Financial Director‘s blog, Tim Ward, CEO of the Quoted Companies Alliance, warned that the proposals could be passed down to small and mid-sized quoted companies, which generally do not pay their executives excessive salaries.

“A number of the government’s pay proposals could present practical difficulties for smaller companies in particular,” says Ward.

Board Intelligence’s Harris also warned the plans, if implemented, could create a “perverse outcome”.

“You could have significant shareholders that would effectively be able to control the board,” she says.

Shared guilt
The failings that have led to the current breakdown of relations between boards and investors have to be laid at the feet of both parties.

Investors have been guilty of failing to pay due attention to company remuneration reports in the past, and then only voting against them after the fact. The accusation often levelled at boards, meanwhile, is that executive pay structures can appear to be excessively complex and convoluted.

According to Pirc’s Powdrill, the next big push will be for “radical simplification” in the way executive pay is presented.

“Everyone hates complexity in remuneration reports, even companies. Everyone thinks it has got too complicated,” he says. “The problem is that remuneration consultants are not going to advocate simplification anytime soon.”

Powdrill gives short shrift to the argument that the breakdown in relations can simply be attributed to a breakdown in communications. The idea that boards just need to communicate better is spurious, he argues.

“Shareholders are infuriated by the line taken by some boards that communication is a problem,” concludes Powdrill. “If companies want to avoid these revolts, then they need to take note of the things that have ticked off shareholders this season and not do them.”

Timeline of a Shareholder Spring

12 April
About 30% of shareholders refuse to back the remuneration report of FTSE 100 medical devices company Smith & Nephew

17 April
Investors at Citigroup vote down the bank’s plan to pay its chief executive Vikram Pandit £9.4m for a period in which its shares plunged 44%

25 April
Nearly 30% of Capital Shopping Centre’s shareholders vote against its pay policies 26 April David Brennan, chief executive of pharmaceuticals giant AstraZeneca, steps down after six years in the job following pressure from shareholders unhappy with the company’s performance

27 April
Nearly a third of investors at Barclays’ AGM protest about the bank’s pay policies – most notably, the £17m pay package awarded to chief executive Bob Diamond

3 May
Sly Bailey quits as chief executive of Trinity Mirror after ten years at the company. Shareholders revolted against her £1.7m pay deal

3 May
More than half of shareholders at insurer Aviva vote against the company’s pay report

3 May
Shareholder rebellions also take place at Inmarsat, Carillion, Premier Foods and Reckitt Benckiser

8 May
Andrew Moss leaves Aviva

8 May
Bookmaker William Hill scrapes through its pay vote with almost of half its shareholders voting against a £1.2m retention bonus for the company’s chief executive

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By Professor Collins Ntim | Southampton Business School