BP's pay revolt was overwhelming, but shareholders shouldn't be handed new powers

Many of our largest companies seem to be struggling to get the 2016 annual report on remuneration approved, but at this stage shareholders shouldn’t have more powers to influence remuneration, argues Wedlake Bell’s Edward Craft

ON the wave of the 2012 Shareholder Spring the UK government decided that non-executive directors could be trusted to keep directors’ pay under appropriate scrutiny and control. The easy government option of new legislation inevitably followed.  A package of measures generically described as the remuneration reporting regime was then adopted which:

• gave shareholders more power through two votes so that they can hold companies to account:
  • a binding vote every three years on a prospective remuneration policy; and
  • an annual advisory vote on the annual report on remuneration; and
• increased transparency and disclosure so that directors’ pay is clear and easily understood.

Many of our largest companies seem to be struggling to get the 2016 annual report on remuneration approved.  BP and Smith & Nephew (S&N) have seen reports voted down, either due to criticism of the quantum (BP) or level of disclosure (S&N), while Anglo American got the vote through with the support of less than three in every five shareholders.

Some 59% of shareholders rejected the BP pay deal, which handed chief executive Bob Dudley a £14m pay package. The vote, while not binding, is one of the biggest ever investor pay rebellions since 2012’s Shareholder Spring’ when investors staged a series of pay revolts in the AGM season.

A politician can make easy mileage from the vexed issue of corporate remuneration. No other issue is more sensitive, more personal to the director and more linked with the themes of trust, accountability, greed and responsibility: executive remuneration has become the proverbial canary in the mine.

Carl Henrik Svanberg, the chairman of BP, opens his chairman’s letter in the 2015 annual report and accounts by describing 2015 as “another challenging year”. BP continues to rebuild following the 2010 Deepwater Horizon incident in which many lives were lost and a vast area was affected by pollution. In that context, a very large remuneration package for an executive based on improved environmental and health and safety performance can be seen both to be a very good barometer of positive change and sustainable corporate growth, while at the same time being simply inappropriate and insensitive.

Responsibility of shareholders and the non-executive directors

The recent BP remuneration awards to its executive directors were in line with a policy already approved by shareholders.  Therefore shareholders need to carefully consider their own conduct: why did the majority of them decline to support the package, has there been a change of heart?  This is a problem which should not have arisen.  Both investors and companies need to work hard to understand the perspective of the other and avoid future major public scalpings which do nothing to support companies within society.

The calls for BP’s remuneration committee to think again would have been heard many months ago, not just in the build up to the recent annual general meeting (AGM).  Clearly the chair of the remuneration committee, Dame Ann Dowling was satisfied that the award package offered to the CEO was appropriate: it will be interesting to hear the private reflections of Dame Ann on this episode years from now.

Should shareholders have further powers to influence remuneration?

Probably not at this stage.  It will be interesting to watch the 2017 voting season when companies will need to adopt new triennial policies on remuneration companies: these companies will start to engage shareholders on this issue in the coming months. It will only be in the years after this that the true effectiveness of the 2013 remuneration reporting regime may be fully assessed.

What we do not want is further government intervention in the relationship between companies and shareholders and the pay awards of a few hundred senior executives clouding corporate governance engagement between companies and shareholders.

Edward Craft is a partner at Wedlake Bell and chairs the corporate governance expert group of the Quoted Companies Alliance