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Impact Investing

IPE special report May 2018

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Hermes against US-style compensation in Europe

UK – Hermes Investment Management (HIM), manager of BT’s pension scheme, the largest in the UK, has written to the management of Nasdaq asking it to ensure that companies listed by it have to seek shareholder approval when stock option plans are introduced. The UK manager is concerned about the spread of US-style compensation packages, which transfer wealth from shareholders to management.

In the letter to Nasdaq, HIM’s director of corporate governance Michelle Edkins writes: “many of the stock option plans in operation at Nasdaq-listed companies, in particular, involve a considerable transfer of wealth from the existing shareholders to the officers and directors. This is more than just a capital allocation decision; in any other form of asset ownership such a transfer without the approval of owners would be considered theft.

“ To ensure that option plans in which officers and directors can participate have legitimacy in the eyes of informed observers, and especially shareholders, approval from shareholders is essential. Performance related pay, whether in cash, option or share grant, is the principal means by which officers and directors are motivated to achieve greater shareholder value and are rewarded for doing so.

“Further, deciding on the structure of performance pay plans, and the awards to be made under them in any one year, involves potential conflicts of interests for officers and directors. As one of the underlying purposes of stock-based compensation is arguably to align interests of shareholders and their agents, the officers and directors, it is an area of company policy in which, we believe, shareholders have a legitimate role.

“ It would be very encouraging if this consultation about shareholder protection measures were to spark a race to the top by the New York and Nasdaq exchanges, as opposed to what appears to be the current situation, namely a race to the bottom,” Edkins concludes.

In early 1998 the US Securities and Exchange Commission approved a NYSE proposal to amend its listing standards regarding shareholder approval of option plans. According to the US Council of Institutional Investors (CII), of which Hermes is an honorary member, the changes opened a loophole for companies to adopt stock option plans without consulting shareholder. The CII says the New York stock exchange will not change its standards until Nasdaq does so and companies can consequently adopt option plans without shareholder approval.

Shareholder approval of stock option plans has been one of the most controversial governance issues in America recently and the CII has urged its members, predominantly large pension funds, to reply to Nasdaq after the exchange asked for comments on its present guidelines.

“ They Nasdaq told us there will be a careful review of the comment letters and I suspect they received many. We sent a comment letter and a number of our members also sent letters. They asked us for some very detailed responses and I suspect that many of these letters are fairly lengthy. But they told us they’d be diligent and do a careful review and proceed from there. The New York Stock Exchange (NYSE) sent a letter to their listed companies on this issue, but that’s the only public thing they’ve stated about this,” says Ann Yerger at CII.

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