Executives beware the winds of shareholder activism
BARELY a day goes by without another incidence of shareholder activism. Investors in blue chip firms ranging from hedge funds to pharmaceuticals have been flexing their muscles with remarkable frequency recently, expressing their displeasure on executive pay and strategic direction.
It is debatable how much of this is to do with policy changes. In the UK, investors are several steps ahead of the government, which has just finished a consultation on executive remuneration and shareholder rights, although the establishment’s newfound interest in pay and performance must have had some effect.
In the US, where investors were first given the right to a non-binding vote on pay last year, the hand of policymakers is clearer. The “say on pay” rule, part of the Dodd-Frank reforms, has made a noticeable difference. Earlier this month, Citi became the first Wall Street bank to lose a vote on pay, with 55 per cent of shareholders refusing to back packages given to top executives.
Yet those policymakers who want to see pay falling across the board could end up being disappointed. In an analysis of the first 100 Fortune 500 companies to file proxies this year, compensation consultancy ClearBridge found that all those firms that produced a positive total shareholder return received at least 95 per cent of votes in favour of their pay packages.
In the case of Citi, shareholders were protesting at years of negative returns that simply weren’t reflected in Vikram Pandit’s pay. The main gripe for Barclays investors was a £5.75m tax equalisation for chief Bob Diamond, which had absolutely no link to performance. Yesterday, holders of Aviva stock forced the company to change tack due to a raft of golden hellos for new executives; self-evidently, a cash payment for an employee who has just started cannot be linked to shareholder return.
A good banker or insurance executive will ultimately be worth the same money, but they will have to earn it in different ways. The days of negotiating upfront cash payments before signing on the contractual dotted line are over, to be replaced by more generous long-term incentive schemes.
This isn’t just about pay, however. Shareholders in AstraZeneca forced chief David Brennan to depart last week because they felt the firm had become directionless under his leadership. Similarly, Man Group boss Peter Clarke is looking vulnerable after a period of sustained underperformance at the hedge fund group.
Today’s results are unlikely to offer him any relief, although he will likely survive the annual meeting.
Whatever the reason for the flurry of shareholder activism, no-one can deny the winds have changed. How refreshing.
david.crow@cityam.com
Follow me on Twitter: @davidcrow83