Executive pay: the failure of shareholder activism

In the UK we now have five years experience of a shareholder approval vote on directors' remuneration. That strikes me as enough time to assess whether giving shareholders a direct say - if only an advisory vote - has made any significant difference.

What we can say is that giving shareholders a vote has led to more dialogue between companies and their notional owners over remuneration. Usually there will be quite a bit of engagement ahead of AGMs, especially if something unusual is suggested.

There has also been a small number of cases where companies have lost the vote. Glaxosmithkline is still the most high profile example. Actually there haven't been many others at all. You might get two or three a year, and rarely a sizeable company. Even if companies do lose the vote, what does that actually mean? There are some fund managers I have spoken to who don't think the GSK rebellion really achieved anything.

Remuneration-related resolutions attract a higher average oppose votes than others, but it's still low overall (I think about 9% last time I looked, will double check this when back at work). And from looking at the limited publicly available voting data you can see that some fund managers rarely vote against remuneration reports.

Meanwhile executive rewards have continued to rise. Base salaries have continued to increase ahead of inflation and ahead of increases for other employees. Meanwhile it's in the 'performance-related' bit of remuneration (bonuses, LTIPS etc) where there has been serious increases. Both the potential awards and actual awards made have increased.

So if we put the low level of opposition to remuneration resolutions up against the ever increasing levels of directors' remuneration, isn't it fair to conclude that shareholders must overall be happy with things as they stand?

Part of the the problem is the principal-agent issue. This is not just about management being the agents of shareholders, but also the fact that fund managers are agents of those whose capital they invest. Ultimately it is primarily fund managers who decide how votes are cast on remuneration, yet it's not their money that they are agreeing to spend attracting, retaining and motivating "world class talent".

That means shareholder engagement over pay may actually serve to legitimise undeserved rewards. The company whose policy has been approved can fairly say that shareholders have backed it, and if 'shareholders' think it is OK who is to disagree. More broadly the focus of fund managers on executive pay serves only to reinforce the idea that only those at the top of an organisation are responsible for its performance and deserve to be rewarded for it.

There are some in the investment world who think that the introduction of the shareholder vote on pay was not really intended to deal with high executive pay. Rather it was a way to take the political pressure out of the issue by looking like it was being 'managed' by shareholders. If that was the case then it has been a success. Those of us who are bothered by ever increasing executive pay (not just for reasons of equity, I personally also think it's simply a waste of money) have spent/wasted five years trying to make the new system work, only to conclude that it doesn't really achieve anything.

Too many investors don't vote against enough remuneration resolutions. By focusing on those they see as the worst, they send the message that the rest of the market is OK. But I think many of us involved in this stuff at the coalface would conclude that there is a market-wide problem.

If on the other hand the Government really did think that shareholder engagement would rein in executive pay, I think it is time they took another look at the problem. If fund managers won't/can't do the job, someone else should.