From BP chief executive Bob Dudley’s bloody nose over his £14m pay deal to Weir Group’s remuneration committee being forced back to the drawing board to rethink their executive payment policies, investors have made it clear this AGM season that they’re no longer prepared to put up with outlandish boardroom pay.
More spirited revolts could still be to come. Notable investor advisory body Pensions & Investment Research Consultants has strongly suggested that shareholders refuse to back WPP chief executive Sir Martin Sorrell’s eye-watering £70m pay award at the advertising giant’s AGM on Wednesday.
AGMs have not been the only arena in which this discontent has been felt. BlackRock chief executive Larry Fink wrote to some of businesses’ biggest bosses earlier this year, essentially slamming them for focusing too much on the short-term and not having enough consideration for the long-term needs of those who had invested in them.
“I think if every fund manager were to write the Larry Fink letter that would make a difference,” says David Pitt-Watson, an executive fellow of finance at the London Business School, when he meets with City A.M. “I’m not saying BlackRock’s perfect but the fact that he’s out there and he’s public...that seems to be a good thing.”
In a new book published on Tuesday, the academic is calling on the public at large to demand more from the companies where their pensions and savings are invested.
“The financial services industry is there to serve us...that is people who are saving and companies who are investing and people who are wanting mortgages and all the rest of it,” says Pitt-Watson, who is also a former head of the Hermes shareholder activist funds in Europe and one of the co-authors of What They Do With Your Money.
While executive pay packets that increasingly swell the back pockets of bosses each year is not the only issue people should be concerned with, Pitt-Watson believes it is one place to start.
“It’s acknowledged by people who I know on remuneration committees that this is out of control and that we need to get back to something that is more sensible and firmer,” he says.
He adds: “We should be paying chief executives well, but it just feels wrong that you pay a chief executive really well and then you say, ‘But I need to motivate them with four or five times that amount in bonuses in order to have them do their job’...Giving them some sort of bonus is fine but at five times the salary, in a really complicated formula that only they and about three other people understand, it just doesn’t feel right as a way of motivating people.”
Ironically, in that statement lies a fundamental flaw with Pitt-Watson’s plan to get people more engaged with how their money is being handled. One of the key shifts he’d like to see before next AGM season is towards more transparency.
“Have you ever looked at the six pages on the remuneration report of a company?” he asks. “Just to understand what’s in there, it would take me a couple of hours and I should be quite good at this.”
Another aspect that needs to be stripped back to basics for Pitt-Watson is what the financial sector is actually there for. He argues that the highly responsive stock market and being asked to prove their progress in a set of figures every quarter has lead companies to believe that what they need to do – and in some cases what investors want them to do – is demonstrate that they can deliver strong performance on a short-term deadline.
“Nobody through the system has demanded that,” he says. “It’s just happened. You didn’t want it when you put the money with your pension fund.”
He adds: “Companies need to understand and have the confidence that if they manage for the long term, a) that’s what they’re commissioned to do and b) they will have the support of their investors in doing so.”
Of course, until people are ready to stand up and tell those who are looking after their long-term savings what exactly it is they will and won’t stand for, the system is left second guessing. Pitt-Watson’s words on this are sobering: “If I’ve had this conversation once, I’ve had it 100 times, it would be fund managers saying we would do more if only we were asked.”
He adds: “The extraordinary thing about our [financial] system is not how bad it is, it is how good it is, but it could be a hell of a lot better.”