Tuesday, 27 May 2008

Polly Toynbee on pay

Oooeerr... this piece from last Friday has a few holes in it.
I think she's aiming at a legitimate target, but missing it because of misunderstanding a) what shareholders can do and b) who the shareholders are.

A shareholder revolt this week at Shell's annual meeting shocked the City. The protest was against a new kind of bonus creeping into boardroom pay - rewarding executives with €1m each (£800,000) just to stay in their jobs. It was yet another reward for failure, since the three executives due these windfalls had failed to get the top job. Presumably entire boards will now apply in future, if this is the reward. The revolt against executive remuneration didn't succeed, of course - only one ever has, back in 2003 - but this time it got close enough to cause a frisson of panic after 49.5% of Shell's shareholders refused to support the bonus payment. Rebellions are difficult, since Labour refused to give shareholders the direct right to vote down remuneration schemes: instead they have to vote down an entire annual report.

First up we have to be careful not to conflate different types of votes. The Shell vote was on a resolution on its Restricted Share Plan, under which the retention awards were being made. The vote at Glaxo in 2003 was on the remuneration report. So the Shell revolt was arguably more targeted than that at GSK.

Secondly not many companies (maybe a dozen?) have failed to win a majority of votes on their rem report since 2003 when it became mandatory to put it to the vote, but it's definitely more than just Glaxo.

Thirdly Labour did give shareholders an advisory vote on remuneration reports which wasn't there before. Yes it could have been binding, though that would presumably technically only require companies to resubmit the report, it wouldn't affect the underlying rem arrangements.

Fourthly I'm pretty sure the vote on the report and accounts isn't binding either, so voting that down is no more effective than voting down a rem report.

I think it's time we had a reassessment of what the vote on pay has achieved. Arguably it isn't focused enough to get at the things stroppy shareholders really want to get at. But equally maybe we don't have the right 'shareholders' to make them the arbiters of what is and isn't reasonable.

Polly claims that "shareholders are mainly pension funds". The reality is that pension funds are probably less significant as direct owners than they were 10 years ago. This is partly due to asset allocation (mature/closed schemes selling off equities) and partly due to the greater delegation of ownership taking place under the DB to DC shift. And in any case in practice most pension funds delegate voting to their fund managers, who are the 'shareholders' companies deal with.

There are a number of factors that blunt fund managers' ability to police pay effectively (conflicts of interest, cultural background etc) which should make us query whether they should play that role. In any case do we really want to limit discussion of executive pay to whether fund managers think it is OK or not?

Notably Heather Connon on The Observer wrote a rather more informed piece a couple of weeks earlier which argues that shareholder activism on pay was failing. And even fund managers acknowledge the problem:

One leading fund manager said that, while the vote on remuneration reports had succeeded in linking pay more closely to performance, 'the quantum being paid has got much higher'. That means more regulation or legislation may be 'the only way to deal with the problem'.

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