Engagement prompts accountability
Proposals for a binding vote on shareholder remuneration, as set out by the UK department for business, innovation and skills earlier this year, could give institutional shareholders a platform to speak out on an issue that has grown in importance since the crisis.
During the recent ‘shareholder spring' in the UK several high-profile pay deals - such as those submitted by Barclays, Aviva, Cairn and Prudential - attracted not only widespread media attention but also investor scorn. The resulting voter engagement put companies on the defensive, requiring them to justify increasing payments with every item of expenditure scrutinsed.
However, simply awarding shareholders more binding powers might not solve the pay problem if investors do not engage, according to FairPensions' Christine Berry. He says: "Simply giving shareholders more power is unlikely to be the solution to the executive pay issue. There is, in spite of the shareholder spring, a need to look at how shareholders exercise the powers they already have. Part of that is looking at the accountability of shareholders themselves to ultimate beneficiaries."
The ‘two strike' rule
The UK has not exactly broken new ground by considering the binding vote. A number of European countries have similar laws, while Australia - home to AUD1.3trn (€1trn) in superannuation assets - recently introduced a ‘two strike' rule, whereby shareholders can trigger a board election if a quarter of them reject two consecutive pay deals.
Before the two-strike rule was introduced, industry warned that imposing such conditions would hurt business. Yet, as recent events in the UK illustrate - with Aviva head Andrew Moss stepping down after half of shareholders rejected his pay package - even non-binding results can effect change.
What is more, because stakeholders share in both gains and losses, it is only fair they be given the power to hold executives to account on pay - a point made by David Bradbury, Australia's former parliamentary secretary to the Treasurer, when he introduced the regulation.
The Australian Council of Super Investors similarly dismissed concerns that votes would de-stabilise companies, saying the two-strike rule would affect only companies that had displayed "intransigence" and "a lack of response to shareholders".
No substitute for engagement
Tougher language on executive pay, coupled with the threat of humiliation at the AGM, might be enough to deter UK companies from pursuing ever-higher remuneration deals. But, as Berry notes, shareholder voting alone cannot act as a substitute for engagement with listed companies.
The recent resignation of Sly Bailey, the chief executive of the newspaper group Trinity Mirror, shows that institutional investors who raise concerns in advance of an AGM can also effect change. Bailey, who had been with the company for a decade, was in receipt of repeated pay increases despite a steady decline in profits and share price, and shareholders - including Aviva Investors and Legal & General - made their concerns known months in advance of this year's AGM.
So even without binding votes, positive results can be achieved through engagement. And if engagement does get results for beneficiaries, then pension funds must not wait for the next financial crisis or public outcry before they act.
They should consider every deal on its own merit and question the ethics of pay deals when profits fall - even if a CEO is fulfilling his pre-determined goals.
See Long-term Matters, page 17 and ESG Report, page 49