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January 15, 2012 3:54 am
The UK government’s recent call for binding shareholder votes on boardroom remuneration to clamp down on excessive pay raises the question to what extent fund managers will use such a tool effectively.
It is a complex issue and much depends on how the detail of such a proposal is fleshed out, according to Liz Murrall, director of corporate governance and reporting at the Investment Management Association.
Institutional investors meet on Monday with the Department of Business, Innovation and Skills to talk about a discussion paper on executive remuneration sent out to investors last year. The government’s proposals to beef up shareholder power and improve transparency on pay are likely to be on the agenda.
The Investment Management Association believes measures are needed to address remuneration excesses and says it is working with the government on reforms to make sure they are workable. But the group does not believe a shift from the current shareholder advisory vote on pay to a binding vote will necessarily work because it “would cut across any remuneration contract and could be destabilising for a company”, says Ms Murrall.
The IMA believes the current non-binding vote on the board’s remuneration report holds companies to account on pay and performance.
“Shareholders meet with the company to discuss pay structures in advance of the publication of the report. In the event the company and shareholders fail to agree and there is a sizeable vote against the remuneration report, then the onus should be on companies to revise their proposals. If they fail to do so, shareholders can decide whether remuneration committee members should be re-elected at the next AGM,” says Ms Murrall.
Maintaining the status quo flies in the face of the government’s current offensive on excessive pay, according to Pirc, the corporate governance group.
“It is not obvious asset managers agree with the government that there is a real problem on excessive pay,” says Tom Powdrill at Pirc. He takes it further. “Asset managers do not use the powers they already have effectively,” he says.
He points to recent Pirc research on shareholder voting.
“If you look at an average remuneration report of FTSE 350 companies [October 2010 – September 2011], just under 6 per cent of shareholders voted against remuneration levels and the average abstention was just under 2.5 per cent. The average level of support on pay is high.”
He attributes the low level of voting opposition among asset managers to a conflict of interest on their own remuneration levels. “Heads of listed asset managers are equally well paid as other company executives,” he says.
Pirc is keen to see the government take the next step on the binding pay vote, but believes it should go further. “There needs to be a wider mandatory package to include public disclosure on how asset managers vote if things are to change,” says Mr Powdrill.
However, others question whether voting on remuneration is the job of the asset manager, who is just the agent for the shareholder. One former industry insider believes a fund manager’s chief responsibility is to maximise returns for investors and not to micro-manage companies.
There is some consensus on the view. “Fund managers are worried a binding vote on pay will jeopardise the share price and destabilise the company. Then it starts to look like micro-management,” says Anita Skipper, corporate governance director at Aviva Investors.
She agrees pay levels are an issue but believes there are better ways to tackle it than a binding vote. Aviva Investors prefers to vote on the re-election of remuneration committee directors and to go down the engagement route rather than public confrontation to bring about change.
“We don’t need a binding vote in the UK where we have annual re-election of all directors [required by the 2010 UK Corporate Governance Code] and engagement,” she adds.
On the engagement front, Aviva Investors and other institutional investors such as BlackRock and several big pension schemes recently joined forces to beef up the quality of engagement with companies.
Ms Skipper says private engagement with companies often brings about policy change but “people do not see the success gained behind closed doors”.
She also believes asset owners, such as pension funds, need to take more responsibility on governance, particularly remuneration. “Owners need to ask fund managers what they are doing about tackling high pay and make their views clear. They take so little interest that responsibility falls on the asset manager,” she adds.
Pirc also wants to make asset owners more responsible for pay policies.
“We have to push ownership responsibilities back down the chain. Pension funds should give specific instructions to fund managers. If this does not happen it is hardly surprising they do not do it,” says Mr Powdrill.
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