Investors’ voting disclosure and financial services pay in the budget
There are two interesting corporate governance developments hidden in the detail of the budget report. Mandatory disclosure by institutional investors of how they cast their votes at company AGMs has been a long-standing TUC aim that we have campaigned for over many years. We have edged closer to achieving this today, as the budget report (chapter 3, page 40) says that the Government will consider using its power taken in the Companies Act 2006 to require public disclosure of voting records for institutional investors.
When this was discussed during the passage of the Companies Bill (as it was at the time) through Parliament, it was lobbied against by all the organisations representing asset managers. In the aftermath of the financial crisis and the belated but welcome recognition that there is a public interest in shareholders carrying out their governance role towards companies effectively, it will be interesting to see what stance these organisations take this time around.
The Government also states that it will consult on further measures to ‘facilitate the consent, by owners, of executive remuneration in the financial services sector’. An obvious step would be to make the results of AGM votes on company remuneration reports binding upon companies; at present, the vote is just advisory.
However, ‘shareholder consent’ for excessive pay packages has proved all too easy to achieve in the past; in 2007, before the financial crisis broke, remuneration reports at UK banks achieved the support of over 77% of votes cast. Even in 2009, after the bail-out of the banks, only 36% of votes were cast against bank remuneration reports, considerably lower than the 47.8% cast in favour.
Unless shareholders change the way they assess executive pay packages, obtaining ‘shareholder consent’ is unlikely to act as a dampener on either the levels or rates of increase of executive pay in the financial sector. To address this, it is essential that pension funds and other fund manager clients make it clear they would like to see their fund managers take a much tougher stance on executive pay. For example, we’d like to see the ratio between pay at the top and the bottom of a company form an important part of shareholders’ assessment.