The shareholder spring is back – but there may be worse to come for CEOs
This is a rotten year to be a chief executive. The impact of new regulations introduced by the Department for Business has been to rekindle 2012’s “shareholder spring”, with a host of firms feeling the heat as up to 40 per cent of their shareholders opposed policies that could bind pay awards for three years. Proxy Insight has already reported that the level of opposition in “Say on Pay” votes at the 20 largest global banks is at 2012 levels. And last week, Burberry became the first FTSE 100 company in two years to see its remuneration package voted down.
Even the example of firms that successfully passed resolutions on pay will have brought little comfort to FirstGroup and Experian, which held stormy annual meetings yesterday. On the morning their executives faced shareholders, Mike Ashley refused his allocation of shares in Sports Direct – approved at the fourth attempt on 2 July – “following recent unhelpful speculation”, as the company put it.
And executives will no doubt feel shareholders are doing them a disservice. According to a pay survey by proxy adviser Manifest and consultants MM&K, total remuneration awarded in 2013-14 was down 7 per cent from the previous year – more than the 5 per cent decline observed the year after the shareholder spring.
Even so, there is widespread confusion about executive pay, and the government’s insistence on a single total figure of remuneration has done nothing to assuage this. According to data reported using this Single Figure, pay has increased 3 per cent on last year, while many newspapers reported a 15 per cent rise. But this is likely to be a bad indication of remuneration committees’ intentions, dependent as it is on stock market performance.
Most smart investors realise their voting behaviour is weighing down on executive pay. In fact, they are setting ever tougher standards. Fidelity, for example, is using its voting power to press for five-year Long-Term Incentive Plans (LTIPs), in place of three years.
All of this is a nightmare for chief executives and boards, who fear losing talent to US companies as Burberry did with Angela Ahrendts. Yet investors failed to see the benefit of a pay rise for her successor Christopher Bailey. The problem is that issuers and shareholders aren’t speaking the same language.
According to MM&K’s Cliff Weight, “too many shareholders think companies are not telling them the whole truth.” Firms have adopted a box-ticking approach to meeting the demands of industry groups such as the ABI and ISS. Instead, they should “embrace the spirit of the new legislation”, by making performance targets more transparent and long term, Weight argues. Ten years, rather than three, would be a good basis for LTIPs.
The risks of not making an effort to win over institutional investors should be clear. Besides further political interventions and shareholder rebellions, firms risk attracting more aggressive activists. Last month, Sandell Asset Management said it would vote against FirstGroup’s remuneration report, noting a doubling of chief executive Tim O’Toole’s pay. Never mind that most of the rise was due to a retention share award and deferred bonus falling due; it could be a while before it is safe to cash in the chips.
Josh Black is a financial journalist at Activist Insight and edits the magazine Activism Monthly Premium.