The 75% solution

If news reports are to be believed, then next week will see the Government set out its stall on executive pay reform. I won't rehearse the issues I think are important, save to say I think failing to put employees on rem comms would be a missed opportunity. Rather, I think the intervention by Fidelity this week is worth having a look at.

They wrote a letter to the FT and subsequently press released the same points. Essentially Fidelity call for a binding vote on variable pay that would be forward-looking (ie if the company lost the vote payments covered by it couldn't be made). Interestingly they also propose that the threshold for passing the vote should be 75%, rather than the existing 50% on remuneration reports, share schemes etc. Plus they suggest a 'two strikes and you're out' approach whereby the rem comm chair has to stand down if the company fails two consecutive pay votes.

It's worth taking these proposals seriously because a) Fidelity rarely speak out on public policy and b) they are in thick with the Tories (they have donated almost £450K over the past 3 years, with a further £50k bunged to the anti-AV campaign). My suspicious mind wonders if their public support for a binding vote is in any way linked to the fact that Cameron's announcement of the idea fell flat.

That aside, I actually think what they have proposed sounds pretty good (it also demonstrates that, of course, you can make a binding vote work if you put your mind to it). Having had a quick look through historical voting data, it looks as tough over the past five years about 100 companies would have failed to clear a 75% threshold. This assumes that investors would vote broadly the same way with a forward-looking binding vote, which is hugely questionable, but at least gives you an idea. I also reckon about a dozen companies would have failed two consecutive votes (Though bear in mind the Shell rem comm chair went after one defeat). So this would have an impact, largely at the margins admittedly, but certainly a potentially tougher regime (depending on voting behaviour).

One issue worth bearing in mind is the shifting nature of UK share ownership. A 75% threshold would mean that, potentially, a company could be defeated on pay policy by the voting power of overseas investors alone. Not a problem in and of itself, but you can imagine that the focus on... cough... ISS... cough.... could become sharper.

Of course, the other thing this approach would do is introduce the idea of a super-majority for certain issues. But if you need 75% to pass a pay vote, why would takeovers still only require a simple majority? Or director elections? Once the principle is conceded you can see that existing thresholds on other issues would also become open to challenge. (Personally I do find it hard to see why it should be harder to set pay policy than to buy/sell a company).