Last updated: June 8, 2012 9:43 pm

Spotlight on shareholder advice groups

Sir Martin Sorrell of WPP

Sir Martin Sorrell and his 60 per cent pay increase has been in the spotlight this week as the remuneration debate has escalated further amid growing unrest at “excessive” rewards for Britain’s top bosses.

However, some investors say the focus should shift from the chief executive of the world’s biggest advertising company by market capitalisation and his peers to the groups that are taking an increasingly important role in making decisions over pay and bonuses.

One of their main concerns is that ISS, the US company owned by international financial information group MSCI and which last week recommended shareholders vote against Sir Martin’s pay rise to £6.8m, is becoming too powerful.

ISS, which first broke into the UK market in 2004, advises about 25 per cent of shareholders in FTSE listed companies, according to investors.

It is now the most influential of the shareholder advisory groups, having overtaken the Association of British Insurers and the National Association of Pension Funds, which represent about 30 per cent of FTSE shareholders between them.

ISS insists it is a force for good, saying it helps improve decision-making by carrying out research and analysis that many investors do not have time to do.

ISS action

A worker is seen working at Cairn Energy Plc's Mangala processing terminal

Five FTSE companies where ISS has recommended a vote against remuneration

Cairn Energy – defeated at AGM with 67 per cent of votes against

Aviva – defeated at AGM with 54.4 per cent of votes against

Inmarsat – passed at AGM with 39.7 per cent of votes against

Xstrata – passed at AGM with 36.5 per cent of votes against

WPP – AGM scheduled for Wednesday June 13

Georgina Marshall, head of European research at ISS, says: “The advisory groups have developed over the last 25 years to provide a service that investors find useful in helping them exercise their ownership rights, such as voting at AGMs.”

A global head of equity at one of the world’s biggest fund managers agrees. “I don’t think we should shoot the messenger when it comes to the advisory groups. The issue is about pay and whether it is fair. We should not lose sight of that.”

But other shareholders and chief executives say the de facto outsourcing of decisions not just on pay, but on director elections and rights issues to groups that are not accountable or regulated will undermine companies and their performance, as significant protest votes or votes against pay often spark selling in their stocks.

US groups, which own about 20 per cent of the UK stock market, tend to religiously follow the recommendations of ISS as they do not have the time to examine the decision-making of their overseas holdings, say investors.

“I once had a shareholder tell me he was totally happy with my company, then he voted against an important matter at our AGM,” says one chief executive of a FTSE listed company. “When I challenged him over it. He said, ‘sorry, I outsourced that’.”

The head of equities at a UK fund manager adds: “We are supposed to be living in a shareholder democracy, but a lot of decisions are being made by an unregulated US group that is not accountable to anyone.”

Ms Marshall disagrees. She says ISS, which represents 1,300 shareholders around the world covering 40,000 companies that they have stakes in, is accountable to its shareholders. “We have transparent policies and our analysis is impartial,” she adds.

She also points out that ISS is not the only shareholder advisory group. There are several operating in the UK, with the ABI and NAPF, the next influential, followed by much smaller groups that include the Pensions Investment Research Consultants, or Pirc, which represents an estimated 2 per cent of shareholders with FTSE listed stocks.

However, concerns have heightened to the point that the European Securities and Markets Authority, ESMA, the European group that advises the EU commission, has launched a consultation into the shareholder advisory industry.

They are taking soundings from investors, regulators and other bodies over whether these groups are conflicted amid some worries that it is in their interest to recommend votes against remuneration to generate headlines and fees.

Certainly, Sir Martin tried to turn the attention on to ISS this week when he accused them of using the wrong comparators in forming their decision on his pay. Some investors agreed with Sir Martin, saying that had WPP had its main listing in the US rather than the UK, then his pay rise would have been backed. This is because his pay is closer in line with his competitors in the US rather than UK groups.

ISS rejects this. Ms Marshall says: “Our vote recommendation against the remuneration report was not based on benchmarking of comparators but the large pay increase of 60 per cent.”

The debate is likely to heighten further next week when WPP is expected to announce the results of the remuneration vote at its annual meeting on Wednesday.

For some investors, however, it is a debate that will last a lot longer than one spat over the pay of one chief executive.

“Sir Martin has been in the headlines this week,” says a senior lawyer at one of London’s top firms. “But the more important debate is over advisory groups. That can only intensify as the remuneration debate continues.”

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