Wednesday, 20 May 2009

What the Shell vote means (and doesn't)

First some basic technical stuff. The vote doesn't mandate anything as it is only advisory, so there is no need for the company to claw back bonuses, resubmit the remuneration report or anything like that. It's embarrassing for them but doesn't require them to do anything.

Second, they clearly will have to do something about it. An obvious reponse would be to get rid of the discretion the remuneration committee has to over-ride/ignore performance targets, but I suspect quite a few shareholders will want to see a general overhaul of policy. The company will therefore have to consult with its biggest shareholders on how to put things right. There's also some talk about whether Shell's rem committee members should be ousted.

Thirdly a bit of context. That's four companies (the others are RBS, Provident Financial and Bellway) that have lost the vote on their remuneration reports so far this season. It's actually the same number (so far) as lost the vote in the 2005 season, so currently joint-top and this could well go on to be a record season.

But actually, given the scale of the crisis, is it that significant? I know there are lots of companies that registered near misses too, so the average vote against a rem report must be up quite a bit, but it's not a generalised revolt over executive pay. What it probably does represent is a toughened approach from some of the institutional investors (ie more willingness to vote against). But guess what, without mandatory voting disclosure we still can't tell exactly what is going on out there.

Looking more broadly, this AGM season probably will lead to more questions about remuneration. The select committee report last week was right to call for a review of how the shareholder vote on rem reports has worked. Have shareholders used the right effectively, and does it go far enough? Increasingly people seem to be asking whether the vote could be binding in any way. I suspect the momentum is there now to make this a live policy issue. Let's hope the Walker Review picks this up.

But to really push the envelope I think we ought to be thinking much more about whether executive remuneration as it is currently structured really does the job. Shareholders have chucked more and more money at directors in the past few years - do the returns they have received indicate it was money well spent? Can directors even influence some of the financial measures that underly incentive schemes, except by self-defeating short-term behaviour or massaging the figures? Don't underestimate the lack of a clear understanding of these issues amongst shareholders who have blindly pushed for 'performance-related' pay.

I don't think we are yet at the stage where shareholders are asking these deeper questions. But it is certainly the time to push in this direction.


CharlieMcMenamin said...

Here's a really, really silly question from someone well outside all this: why do firms pay bonuses at all? Is it because they don't trust their execs to do right by the shareholders without them?

So why not just pay bonuses & cut the base salary entirely? Well, because everyone knows that would be silly, as it would mean people would have an incentive to fix the figures to make sure they get their bonus...and if there's a danger they might do that on a 100% bonus income, why not on a 50% bonus income?

Where all this comes from, as a system of renumeration, is the fact that owners don't really trust managers, and can't be arsed to exercise their responsibilities as owners. So they emotionally invest in a theory which says interests can be aligned via bonuses.

I say managers' interests can be aligned with key stakeholders through election of execs and dispersed stakeholder ownership, including worker ownership.

I really like your blog Tom - I've learned so much from it - but sometimes as I read your coverage of ever little detail of polite intellectual evasion of an obvious truth, I wonder why you don't just run screaming with a meat cleaver through the City of London in disgust at how far these people have to travel...

Tom P said...

Hi Charlie

The short answer is yes - shareholders have promoted 'performance-based' pay because they believe in agency theory hook, line and sinker. Without big dollops of pay to incentivise them, managers would not do the right thing/take risk/maximise shareholder value.

I can't get over how crude the 'understanding' of shareholders who have advocated this approach to remuneration is. Not only are the assumptions challengeable, put the actual practice is stooopid too. It has focused attention on a measure - share price - which can have little to do with the underlying business. And what can directors actually do to affect it in any case.

To be honest remuneration is one issues where I find myself getting more militant the more I find out about it.

I don't get out my meat cleaver because I still think we can do something about it. I think we are approaching a point where a more fundamental discussion of these issues is possible, and in Paul Myners we've gote a City minitsre who a) actually understands this stuff and b) is motivated to do something about it. Shame he's only got a year to do it in!

PS. One of the most articulate attacks on the City can be found in the last chapter of John Kay's most recent book. I felt like cheering after reading it!

eda said...