Shareholders take a tougher line with firms

ARE institutional shareholders finally getting tougher with the companies in which they invest? Investors have taken their share of the flak for being too weak to intervene when things were turning sour in the run up to the financial crisis. While non-executive board directors failed in their duty to stand up to the likes of Sir Fred Goodwin, institutions were also culpable. They have rightly been accused of complacency after riding the wave of surging share prices when times were good then being too slow to react once signs of the overheating economy first emerged.

However, fresh research from the well-respected insurers group the ABI – the insurance body whose members control assets equivalent to a quarter of the UK’s capital – has found shareholder activism is now on the rise when measured by how institutions vote at companies’ annual meetings.

The ABI’s institutional voting information service published today show a much higher vote against companies in 2009 than even the previous year at the heart of the financial crisis. The reason, the ABI report concludes, were the increase in serious breaches in governance – including proposals to award executives excessive remuneration packages during a downturn.

ABI “red top” reports highlight matters of serious concern with governance issues. Following red top reports last year, an average of 30 per cent of shares were not voted in favour of management last year compared with 13 per cent in 2008. Of all the reports published by the ABI in 2009, 12 per cent were red, 20 per cent were amber and 68 per cent blue – indicating no areas of major concern.

Five company reports on remuneration were voted down by investors last year. They were Bellway, Provident Financial and Punch Taverns – which were all red-topped by the ABI – and Royal Dutch Shell and RBS, which were amber-topped.

The review also found executive pay inflation slowed last year with base salaries for FTSE 100 chief executives rising by 5.3 per cent. Average bonus payouts were also down to around 90 per cent of base pay compared with over 110 per cent in 2008. So is the message getting through to companies that institutions will no longer tolerate rewards for failure?

Peter Montagnon, the ABI’s director of investment affairs, says it is clear shareholders are ready to signal their impatience with companies whose remuneration approach does not take account of the impact of the economic downturn. “This mood appears likely to continue in 2010. Given the strong public focus on remuneration, it is more important than ever that companies develop policies which are properly focused on linked pay to performance in delivery of agreed strategy,” he adds

Institutions could still be accused of trying to play catch up in their approach to policing good corporate governance. But it is a positive development that deserves recognition.