Shareholders are finally exerting pressure on executive pay, but it’s not enough
Over the past week, we have seen significant shareholder revolts on executive pay at Barclays, Xstrata and Man Group. At Aviva’s AGM on Friday another big shareholder rebellion on pay is expected.
Yet what is notable is that despite the media portrayal of angry shareholders, a majority of shareholders did in fact vote in favour of the remuneration reports in question. When abstentions are discounted – and in law abstentions do not count towards the result – 73% of Barclays’ shareholders and 63% of at Xstrata’s shareholders voted in support of the companies’ remuneration reports. While the Aviva board may be expecting to receive a bloody nose on Friday, it is again likely that despite some significant opposition, the remuneration report will be carried.
This is the great contradiction of UK corporate governance: shareholders have considerable powers with which to monitor companies and hold them to account, but are reluctant to use them. This leaves a dangerous vacuum that allows boards to set their own pay more or less as they wish.
This is why the TUC believes that workers should be represented on remuneration committees. We believes that this would bring a much-needed dose of common sense to discussions, and ensure that remuneration committees took account of pay and conditions elsewhere in the company when setting directors’ pay, as they are required to under the Combined Code.
Despite shareholders’ lamentable record of using their existing rights to tackle executive pay (and evidence from other countries that worker representation on remuneration committees helps to curb executive pay), the Government has based most of its proposals for addressing executive pay on strengthening shareholder rights.
However, its recent consultation did recognise the problem of shareholder inaction: ‘the increasingly diverse and fragmented nature of shareholders in the UK means that the likelihood of seeing 50% or more votes cast against any resolution can be reasonably expected to remain extremely low’. And to address this issue, the Government has suggested raising the threshold of support required for remuneration reports to 75%.
There is certainly evidence that this would increase the ’bite’ of shareholder votes on executive pay. While just 18 votes on remuneration reports have been defeated by shareholders at company AGMs since the shareholder vote was introduced in 2003, according to PIRC research 85 companies failed to secure a vote in favour of 75%, 31 of which were in 2011. Going back to the shareholder revolts of the past week, both Barclays and Xstrata would have had their 2012 remuneration reports defeated had the threshold of support required been 75%.
The Government has put shareholders at the centre of their approach to tackling executive pay. Raising the threshold of support to 75% is necessary to make this approach work: without it, there is a danger that the Government’s proposals will have little impact in practice. The Government should either change its approach and recognise the need for workers to be represented on remuneration committees, or hold firm against corporate lobbying and stick to its proposals.