More than five years into the current financial crisis, one could be forgiven for thinking parts of the financial industry have returned to business as usual. The perception, based only in part on fact, that executive pay is rising sharply while other incomes are stagnating eventually led to the backlash that was the ‘Occupy’ movement.

However, resistance to high pay and the perceived inaction of shareholders in letting the remuneration deals and bonus packages pass took on a political dimension in early March.
For one, a Swiss plebiscite – one that pre-dated the protests outside St Paul’s Cathedral and the New York Stock Exchange by representatives of the so-called ‘99%’ – saw a legislative proposal, endorsed overwhelmingly by voters, demanding that domestic pension funds exercise their voting rights on Swiss stocks, as well as outlawing golden hallos and goodbyes.

Almost concurrently, the finance ministers of the European Union – bar the UK’s George Osborne, aware of the interests of the City of London – voted to introduce a cap on banking bonuses of two years’ salary.

Raj Thamotheram of the Network for Sustainable Financial Markets claims institutional investors have long been “intentionally blind” to executive pay and should not be surprised by the backlash.

“What’s happening in Switzerland is evidence that normal people in a very capitalist society think the situation is now so bad they are telling investors what to do,” he says.
He adds that investors have brought the situation upon themselves through their own inaction, and that the “solid” Swiss vote – 67.9% voted ‘yes’ on an average turnout of 46% – should be a wake-up call, as it would not be the end of the public trying to wrest control over such issues away from investment professionals.

The Swiss parliament is now tasked with legislating for the changes against the ‘rip-off culture’, despite its own legislative counter-proposal opting for voluntary over mandatory engagement.

Christoph Ryter of the Swiss pension association ASIP notes that parliament does not have very much room for manoeuvre to amend the law and that the Bundesrat must now draft a pre-legislative document within a year, which, in turn, must then be passed into law.
But he says some hope remains for smaller pension funds on the issue of voting. ASIP has previously spoken of the administrative burden of actively engaging with all domestic companies to which a fund has exposure, especially as these investments may be relatively small and held within a passive index vehicle.

Ryter says some politicians have discussed an exemption for small pension funds. “Only the legislative process will show if the suggestion will be adopted. At the moment, the proposal is fairly absolute in that pension funds must exercise their vote,” he says, but adds that, due to the year allowed to draft the proposal, the plebiscite will not impact this year’s AGMs.

“But pension funds are well advised, especially those that do not actively exercise their voting rights, to consider how they will in future act.”

Ryter says it is very hard to predict whether mandatory engagement will lead to a shift in investment strategy – such as a move out of passive funds as pension investors focus their assets on a smaller number of companies.

Such an approach would not be unprecedented. Speaking to UK parliamentarians earlier in the year, Simon Wong of Governance for Owners suggested that diversification did not require UK investors to invest in several hundred listed domestic companies and that instead they should focus their attention on several dozen, actively managing these holdings.