Shareholders are on the money in scrutinising pay
AS LITTLE as a decade ago, few City-watchers would have cared all that much about the April AGM deluge, but not any more. In rising markets, short-term investors and speculators could ignore the niceties of shareholder democracy and vote with their feet. Several crashes later and investor uncertainty is manifesting itself through the ballot box, with Aviva last week the most prominent victim of a shareholder revolt. Unlike the US though, European shareholder activism isn’t driven by a rules-based requirement to vote, but a deep concern that without informed oversight of their investments, shareholders pay a steep price for managerial excess.
Does the recent upswing in voting against remuneration represent some kind of “Investor Spring”? My answer is both yes and no. Yes, because it is true to say that there are more votes withheld at more and bigger companies than in prior years. At the same time, no – because what we are seeing is simply the logical progression of what many investors have been doing for some time – making serious points, giving companies the benefit of the doubt and then escalating their actions if they feel dialogue has fallen on deaf ears.
Personally, I don’t think a continuous round of big fights at the ballot box is a good thing. It reflects a failure somewhere along the way. The objective for management is 100 per cent support, and anything less than 90 per cent is cause for concern.
Each and every one of the pay battles so far this year represents an individual tipping point for investors rather than a mass uprising. It’s not that shareholders wilfully ignore everyone or don’t care, it’s quite simply that investors with large, globally-diversified portfolios have to pick their battles.
Despite the naysayers, there is strong evidence that share ownership by executives really does align interests and promote pro-shareholder behaviour – see Director Ownership, Governance and Performance by Sanjai Bhagat and Brian J. Bolton. So investors are rightly paying close attention to the strategic linkages between pay and performance. Or more precisely, more shareholders are now paying closer attention than ever to the governance of pay.
Shareholders spend a great deal of time engaging with remuneration committee chairmen about their concerns, the problem though is that it looks like those chairmen think they are in a negotiation. That’s where they’re wrong and that’s why the votes are now not just going against the remuneration reports but the remuneration committee chairmen as well. Whether these negative votes stiffen the resolve of the non-executive directors to stand up to the chief executives remains to be seen but the message from shareholders is clear – do your job or if you don’t we’ll find someone else who will.
Sarah Wilson is the founder and chief executive of Manifest, the proxy voting agency.