Why investor pay revolts need to get personal
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Who is responsible when pay goes wrong? You wouldn’t always know by looking at the results of shareholder votes on the matter.
The messy business of the UK annual meeting season is well under way. Against the backdrop of the pandemic and a clamouring for executives to share in the pain of employees and shareholders, this counts as a pretty bad-tempered pay round.
Yet it still feels like a slightly odd dance, one where investors sometimes find places to register their disapproval but in a way that doesn’t risk upsetting anyone too much. Just look at the willingness to vote against reports on executive pay and the apparent reluctance to vote against the individuals in charge of making the decisions.
This year we’ve had what counts as a big revolt at Rio Tinto, whose pay report was rejected by 62 per cent of shareholders that voted but whose remuneration committee chair Sam Laidlaw was re-elected with 95 per cent of the vote. Pay reports at the London Stock Exchange and BAE Systems were rejected by about 23 per cent of voters but the boards, including those charged with overseeing pay, came through with nothing like that level of dissent.
For companies that have faced a revolt on their pay report this year, defined as at least 20 per cent opposition, less than a fifth also faced similar pushback to at least one director, according to Proxy Insight.
Tom Powdrill, head of stewardship at proxy adviser Pirc, reckons that the average asset manager might vote against 10-20 per cent of UK remuneration reports, although a few now object to significantly more. But votes against directors are less common, he says, perhaps under 5 per cent. Some groups remain wary of voting against individuals on any grounds.
Rewind a few years and most UK institutions took that view, either out of a sense of propriety or excessive politeness. Significant votes against pay at places like BP or WPP were accompanied by board results that implied blind loyalty to directors or their practical irrelevance to the objectionable outcome. Companies then used the result to play down the extent of investor dissatisfaction. Move along, everyone. Nothing to see.
Now there is an emerging but minority view that, as one stewardship head puts it, “personal accountability is vital if we wish to see change”.
This isn’t always easy, not least at Aston Martin where voting against the remuneration committee chair would have meant a vote against the only female board member. Investors were exercised about the lack of diversity, as well as executive pay.
Advocates acknowledge this is a qualitative call, based in part on how well the company has handled an issue. Some investors are reluctant to penalise individuals in what they see as one-off or idiosyncratic situations (which amounts to a pass for bad decision-making).
But everyone could benefit if the default policy was accountability, with exceptions clearly explained.
Blackrock’s policy, for example, is to vote against the relevant directors where it has concerns. But it this year backed Rio’s Laidlaw because (rightly or wrongly) it said it recognised the legal constraints facing the board. AstraZeneca’s remuneration chair escaped unscathed, despite a 40 per cent vote against its second new pay policy in two years, perhaps because he was new in the job. But another director overseeing pay did suffer a smaller but sizeable vote against.
No one wants to lose good board members — and director votes, unlike pay reports, are binding. But the prospect of meaningful rebuke should strengthen boards’ hands in negotiations with hard-charging chief executives.
Reluctance to carry pay angst through to its logical conclusion lays investors open to the accusation that they blindly follow proxy advisory firms like ISS, which themselves tend to be a little gun-shy in advising votes against directors.
The more damning charge is that voting only against the pay report looks an easy but largely empty protest: a good signal to send, to customers and ESG enthusiasts as well as the company, but one that’s unlikely to cause too much trouble.
Most pay debates boil down to board judgment. Where investors believe that the pay is unacceptable but the judgment of those in charge was fine, they should explain why. Where they really think pay is a problem, it’s time to get more personal.
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