THE shareholder spring of 2012 may seem like little more than a distant memory now, but its impact still reverberates across boardrooms in Britain. The investor uprising at Aviva, Prudential, Trinity Mirror, and AstraZeneca among others had an enormous impact on listed companies in the UK. It set in motion a chain of events which arguably contributed to the 2012 and 2014 revisions to the UK Corporate Governance Code, and it has dictated the discourse on executive rewards ever since.
This may come as a surprise to some; there are certainly those who feel that the uprising generated more light than heat. But the revolt over directors’ pay and rewards set a context for boardroom announcements that journalists, policy wonks and government tuned into and have remained attuned to ever since.
Only last year a number of major plcs struggled to obtain widespread investor support for large executive pay packages. Barclays, Standard Chartered, Sports Direct, Burberry and latterly BG Group all faced shareholder pressure over the proposed pay packages of their respective CEOs.
BG Group’s actions in particular was a cause for much head-scratching. Historically, the company had been very transparent in communicating with stakeholders, notably to the stock exchange.
But when shareholders voted on the pay package of a new CEO in a binding vote, BG chose to tear the results up. Not a little disrespectful and possibly not very smart. Even large investors who had nodded through pay packages on the back of large dividends, rebelled.
BG Group’s actions are understandable in the context of it being long-recognised that charismatic leaders can have a massive influence on the share price. When Harriet Green left Thomas Cook last year without warning, the share price took an instant hit.
Such examples obviously provide leverage for high executive packages to get voted through – although BG failed because of the size of the package on offer (£25m) and the lack of a proven track record of Norwegian, Helge Lund.
One can speculate about why the board thought it was a good idea to put such a huge sum in front of shareholders. Perhaps it was put forward in the knowledge that it would certainly be rejected, which then kept the door open for a smaller but still substantial package offering a ‘win, win’ solution? We will never really know, but the package Mr Lund ended up with was still, nonetheless, substantial especially when one looks at the relative size of BG compared to other companies operating within the same sector.
This year, new regulations are in place to curb such excesses. Companies will have to demonstrate that executive pay is linked to the long term performance of the company (as stated in the 2014 UK Corporate Governance Code).
Until the latest revision of the code which was published in September 2014, boards could choose to ignore a large chunk of shareholders provided the annual report was passed by a majority. It’s therefore very significant that the FRC have now added the requirement that boards explain publically what action they plan to take following a meaningful opposing vote – which includes pay awards.
For the banking sector, there are further safeguards with the soon to be implemented FCA rules on executive remuneration which require UK banks to explain and justify remuneration for all their executive directors and CEOs.
The FCA explains on their website: “Our remit on remuneration is to make sure that pay practices in the firms we regulate do not encourage inappropriate risk taking and that firms do not pay out more than they can afford. We are not looking to limit individual levels of pay, as that is not our mandate, but we believe that firms must have remuneration policies that are consistent with sound risk management.”
Add-in the government’s Binding Vote Policy, which also aims to limit future pay awards, and it’s clear that companies will be under pressure to demonstrate that, in all things, they are both fulfilling their fiduciary duties to their company and working constructively with shareholders.
We must wait and see what impact this all has. There is no doubt, as I’ve described, that executive pay has soared over the last few years and the IoD has spoken out against what we regard as grossly excessive levels at listed companies. This is certainly a matter for a company’s owners to respond to, rather than politicians. But while the court of public opinion has been vocal in this area, many institutional investors have been far too apathetic.
Free market sensitivity
Political sensibilities will be much keener this year with a General Election looming. It’s important therefore that large listed companies don’t propose pay packages that could do untold damage to corporate Britain as a whole and consequently become a red flag for opponents of the free market.
In simple terms, pay packages should be transparent, linked to long term strategy and performance and adhere to binding votes. Companies need to avoid capitulating to short term share price pressures and instead, maintain confidence and faith in a longer term strategy. Business needs to strengthen its focus on the longer term and the sustainability of value creation – as stated in the code. Exactly the ethos that the IoD believes is needed to continue to improve business performance.
Oliver Parry is a senior adviser in corporate governance, company law and financial services at the IoD