Talk of a ‘shareholder spring’ is premature
The Government has confirmed in the Queen’s Speech that it plans to legislate on executive pay in the coming Parliament. The provisions will be included in the Enterprise and Regulatory Reform Bill, and, according to the Government, aim to ‘strengthen the framework for setting directors’ pay’. At least that’s an aim we can all agree with.
There is practically no detail on what proposals will be included, with one exception: section 439(5) of the Companies Act will be repealed, which effectively paves the way for a binding shareholder vote on future executive pay, one of the Government’s key proposals as set out in its recent consultation. Introducing a binding vote on future pay is a sensible step which the TUC supports. However, unless shareholders exert a much tougher approach to remuneration reports than they have done hitherto, there is a danger that in practice it will have very little impact.
This is why the Government’s other key proposal in its consultation – raising the threshold of support required for remuneration reports to 75% – is so important. Counting the two defeats so far this year, a total of 20 remuneration reports have been defeated at company AGMs since the advisory vote was introduced in 2003, out of literally thousands of votes that have taken place. Had the threshold been 75%, over 85 remuneration reports would have been defeated up to and including 2011 – still a low proportion of the total, but significantly higher than 20 (or 18 as it was at the end of 2011).
There has been much talk recently of a ‘shareholder spring’ (meaning increased levels of shareholder activism), fuelled in particular by the recent defeat of Aviva’s remuneration report at its AGM last Friday. It is great to see shareholders finally flex their muscles a bit on executive pay, but it is premature to read signs of a ‘shareholder spring’ from one AGM defeat.
There have been flurries of shareholder activity on executive pay in the past. Four companies had their remuneration reports defeated at their AGMs in 2005, yet this was followed in 2006 with just one defeat, and in 2007 and 2008 there were no defeats at all. The next peak came post financial-crisis in 2009, which saw the defeat of five remuneration reports; yet this was followed by three defeats in 2010 and three last year. The recent high levels of ‘no’ votes on remuneration and the defeat at Aviva, while welcome, may be more a case of shareholder burps than a shareholder spring.
Average votes against remuneration reports as a whole, while creeping upwards, remain extremely low, rising from 3.3% in 2006 to 6.0% last year. This modest increase covers a period of recession, characterised by poor company performance, low (in some cases negative) levels of shareholder returns and public outrage over executive pay. In this context, an average ‘no’ vote of 6% does not look like the spark needed to set the executive pay bonfires burning.
Several commentators have interpreted Aviva’s remuneration report defeat as a vote of no confidence in its Chief Executive Andrew Moss. Yet, shareholders supported Andrew Moss’s re-election by a margin of over 5:1. Confused? Apparently, the explanation for this seeming contradiction is that shareholders are reluctant to vote against a director (in this case the Chief Executive) because these votes are binding, so they would rather use the currently non-binding remuneration report vote as a means to send a signal of disapproval of the Chief Executive.
This contorted logic is as surreal as it is ridiculous and raises serious questions about whether investors are on the right page when it comes to using their voting rights. It raises particular questions about how the introduction of a binding vote will affect voting behaviour. If this is the logic that informs the way shareholders use their current voting rights at companies, is strengthening their voting rights really the best way to curb excessive executive pay?