Mood of miltancy in the City grows
A new mood of militancy is bowling through this year’s season of public get-togethers between companies and their shareholders. And it is extraordinary for several reasons.
For centuries annual meetings have been polite affairs. The big institutional insurance and pension fund managers, who own the bulk of shares, usually back management having thrashed out concerns privately long before they reach the ballot box.
Not this year. There has been a breakdown in discussions with several boards that institutions accuse of persistently rewarding executives for anaemic performance with multimillion-pound bonuses. This comes against a backdrop of deepening anxieties about jobs, wages, and returns on savings. Shareholders have simply lost patience with persistently poor returns over five years.
This week investors in Aviva refused to back the UK insurer’s pay plans for top executives. It is only the fourth FTSE 100 company ever to lose the vote in Britain’s decade-long history of having a say on pay.
The backlash started against banks paying large chunks of profits to staff. Just over half of Citigroup’s shareholders refused to back its remuneration scheme last month. Then large swaths of UBS’ shareholders this week voted against the management’s performance and its pay plans.
In the UK, nearly a third of Barclays’ investors refused to back its pay report, despite a last-minute dash to deflect shareholder anger by publicly promising to boost dividends and cut the bonus of its chief executive Bob Diamond.
One seasoned adviser to Barclays remarked: “After that, Barclays remuneration committee meetings will never be the same again”.
And it is not hedge funds, activist arbitrageurs or corporate governance nuts that are leading the protests. “This is the City turning on the City. That is what is so remarkable about this so-called shareholder spring,” says one UK-based proxy adviser.
Those rebelling are long-term corporate backers such as BlackRock, Invesco, Aviva’s own investment arm and Standard Life. Now they are taking the battle beyond the banks to other companies and other countries.
In Europe, the backlash over executive pay is still largely confined to the banks. But Susannah Haan, secretary-general of the Federation of European Issuers, says: “European companies understand it is coming”.
So far the uprising has cost two UK chief executives their jobs. Two weeks ago David Brennan, chief executive of AstraZeneca, bowed to pressure from the pharmaceutical group’s top shareholders and stepped down at the annual meeting. This week Sly Bailey stepped down as chief executive of media group Trinity Mirror days before the annual meeting and after the company failed to find a compromise over her £1.7m pay package.
Investors are not going into battle lightheartedly. “Bringing these things to a head is very destabilising – for companies, employees and our investment,” says the chief investment officer of one group.
But the head of another leading shareholder group says: “We are fed up with companies coming back with poorly structured pay plans year after year.”
Another says: “We have reached a point where we are saying we have to change the mindset and if that requires sacrificing a head, so be it.”
The no-votes do not simply reflect poor communication between boards and owners, says Robert Talbut, chief investment officer of Royal London Asset Management: “Companies would be wrong if they believe that.” Nor, he adds, should the no-votes be seen as a sudden knee jerk. “They reflect calls for fundamental reform” aligning pay to performance.
Keith Skeoch, chief executive of Standard Life Investments’ chief executive: “Boards have to get away from the idea of delivering large lumps of annual income [to executives]”.
Pay is the flashpoint for wider shareholder dissatisfaction with companies’ long-run returns and management. The no-votes signal concerns about a board malfunction, explains Sarah Wilson, chief executive at Manifest, a voting agency. “Remuneration is the window to the soul of the company. It objectively measures the links between incentives, behaviour, strategy and outcomes”.
The sudden burst of public voting protest has in part been driven by the US where investors have now had an advisory vote on pay for two years and are now finding their voices.
Last year 41 companies’ pay plans were turned down within the Russell 3000 index. So far this year, eight have suffered the same fate, with the Citi vote setting a new high water mark.
“The Citi vote was electrifying. It shook us all up big time,” says a EU-based investor. It shows that – contrary to the beliefs of some chief executives – US shareholders do care about pay if not aligned to performance.
Bank boards in the US, UK and Europe redoubled attempts to allay investor concerns over bonuses, says ISS, a proxy voting adviser.
The say on pay in the US “has stiffened the sinews of shareholders and regulators and the contagion is spreading to other territories, such as Australia, South Africa and Europe,” says Tom Gosling, pay consultant at PwC.
Even without the US impetus, many shareholders in Europe who have long had a vote on remuneration reports have been spoiling for a fight. Politics has been driving pay up the agenda amid criticism that investors failed to act like owners and did not curb the outsized executive incentives blamed for fuelling the financial crisis.
In 2010 the European Commission issued a green paper on the governance and pay of banks explicitly querying “the effectiveness of corporate governance rules based on the presumption of effective control by shareholders”. Confidence in the model “has been severely shaken, to say the least,” it said.
That year the UK came up with the Stewardship Code setting out a blue print for enhancing shareholders’ engagement with companies.
Mr Skeoch says the code has galvanised shareholders. “Investors are a lot more joined up about issues. They are much more prepared to vote to signal intentions – and they will do so internationally”.
The code has not, however, staved off government intervention. UK politicians are now proposing to make the vote on pay binding. Shareholders do not much like the idea but recognise the political will behind it, given the widening gap between ordinary workers’ pay and bosses’ bonuses.
As one investor comments: “Boards can’t sack lots of people and then immediately come back with a pay rise for executives. Consciously or unconsciously it is distasteful.”
But some shareholders resent being squeezed between what one described as “unembarrassable” boards and policy makers who expect investors to act as board consciences.
Ms Wilson from Manifest adds: “Shareholders don’t want to micromanage or set pay. That is not their job. This is about stiffening the resolve of remuneration committees.”
So will companies continue to suffer public beatings? We’ve seen these shareholder springs before. In 2009, 59 per cent of shareholders voted Shell’s pay plans down. But the threatened wider revolt never materialised as corporate returns recovered.
“Is the trend here to stay?” asks Amra Balic, head of corporate governance for Europe Middle East and Africa at BlackRock. “It depends on whether companies learn anything from this years’ experience.”