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Will UK's ‘Shareholder Spring' last?

Will Britain's so-called Shareholder Spring — the spate of investor rebellions against ultra-generous pay packages, which has already resulted in the ousting of a couple of chief executives — lead to tangible long-term change?

Concern about out-of-step executive pay has rumbled under the surface for decades. Over the years, irate shareholders raising questions about huge pay settlements have been a fairly common sight at AGMs, though these were often protests by solitary agents, treated with embarrassed silence from other investors.

British investors have gained a pretty passive reputation, as the Ownership Commission chaired by economist Mr Will Hutton, recently noted. “The recent debate over the explosive growth of executive pay compared to performance is another example where it is felt that PLC (public limited company) shareholders have not exercised their ownership responsibilities as they should have done,” said its final report. Around 75 per cent of all shares issued in the UK are now owned by institutions, giving them considerable power over companies, which “could be harnessed to serve the broader social and political interest of those for whose money they are responsible.”

Combination of factors

Late last year, a High Pay Commission also noted the low level of engagement and its consequence: top-level pay had “spiralled alarmingly to stratospheric levels.” At BP, top pay was 63 times that of the average employee in 2011 against 16.5 times in 1979, while at Barclays it was 75 times that of the average worker, against 14.5 times in 1979.

Quite what it is about the current circumstances that have opened the floodgates can only be guessed at. Mr Richard Murphy, director of Tax Research UK, which conducts research on taxation and other accountability issues, argues that a combination of factors has piled the pressure on institutional investors.

No end in sight for low rates of return, increasing competition for funds, and a demand for more accountability from money managers in the face of increasing disconnect between performance and pay, have all come together, he argues. “There is a real change in sentiment about the obligations of institutional investors…about a decade ago when it was perfectly obvious that big change was needed they were willing to turn a blind eye,” he says.

Angry shareholders

The impact has been dramatic. On May 8, Mr Andrew Moss, CEO of Aviva, announced he was stepping down after a majority of shareholders voted against the company's remuneration report. It is only the fourth ever FTSE 100 company to face such a rebellion. The pay package for CEO of media group Trinity Mirror, Ms Sly Bailey, was approved, but only by just a majority, and it has since been announced that she will be stepping down.

Last week, Cairn Energy (no longer in the FTSE 100) saw its remuneration report voted against by a staggering 67 per cent of shareholders. The size of the vote against the report means that there would have to have been a very high participation rate by institutions.

For campaigners, it exemplified the nuanced nature of shareholder rebellions and the failure of firms to be able to pacify shareholders with gestures. The vote came despite its decision earlier in the year not to award Sir Bill Gammell, its chairman, a transaction bonus over the sale of the Cairn India stake to Vedanta Resources.

“He initially relinquished the transaction fee but shareholders are still unhappy about the fact that he was getting 1.4 million pounds in a termination fee, which many felt was inappropriate given that he was moving to being chairman,” says Ms Louise Rouse, director of engagement at Fair Pensions, an organisation that tries to get individuals to be active in demanding more of their pension and other funds. “It was more than just about high pay…there was a feeling that this was just bad practice.”

Currently under the spotlight is government-controlled Royal Bank of Scotland, whose AGM takes place on May 30. PIRC, a prominent shareholder advisor, urged investors to reject not just the remuneration report but also its annual report on the basis of a “problem” with its accounting standards

Online tool

Campaigners are hoping to keep up the momentum. Hundreds of pension and saving product providers have already received messages from consumers, through a new online tool created by Fair Pensions.

“We are already getting calls from pension and Investment Saving Account providers wanting to discuss how they can respond…they are now realising they are being scrutinised by customers to a much greater extent than ever,” says Ms Rouse.

Of course, the messages aren't always listened to. At the Barclays AGM, where 31.5 per cent rejected the remuneration report, which included a 17 million pound payout to the CEO, Mr Bob Diamond, the Chairman, Mr Marcus Agius, tried to position the vote as a failure of communication.

“Evidently, we have not done a good enough job in articulating our case,” he said. Cairn Energy too pledged to listen more closely in the future, while book makers William Hill made it clear that they had no intention of changing the pay arrangements, despite a 49.8 per cent vote against its remuneration report.

Support could potentially come in the form of new legislation. Britain's Business Secretary, Mr Vincent Cable, has been pushing for rules that would not only require companies to be more transparent in the way they present remuneration reports, but would also make shareholder votes binding.

Legislation support

“For example, the future pay policy might require approval by 75 per cent of the votes cast,” he said in a speech earlier this year. The government has just finished a consultation on the matter and plans to include it into a recently introduced parliamentary Bill.

Even the business community seems to have realised change is needed. The ratcheting up of pay to an “unacceptable level” was “unhelpful to the reputation and legitimacy of the UK business community”, the Institute of Directors said in its evidence to the consultation. It supports a binding vote on pay, though it argues that it should only require a simply majority for approval.

Of course, what will make the difference in the long term is whether this level of shareholder activism can be maintained. What would help keep up the pressure, campaigners argue, are rules making it mandatory for institutional investors to make their voting decisions public, as well as changes to the structure of remuneration committees. (While by no means immune to criticism, executive pay in Germany has been reined in by a number of checks on remuneration committees and boards, including having employee representatives).

As we in India know very well from last year's anti-corruption drive, public pressure and promises of tough new measures aren't always adhered to, and are sometimes followed by long delays, watered-down legislation, and a backseat in the minds of many. Could Britain's new-found shareholder activism suffer the same fate?

Mr Murphy is optimistic that it won't and that a real change in public sentiment, tough economic conditions, and a fall of the inflow of funds mean that the pressure of accountability on money managers will only increase. “Now we are seeing institutional investors saying no, and that is the radical change.”

Source: Business Line

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