An executive legitimacy crisis

"Legitimacy or illegitimacy characterise the relationship of government to the governed - or, more broadly, the nature of authority. The relationship is legitimate when people in general accept the institutions and procedures of authority and the decisions which emerge, even when they don't like them. When that general acceptance becomes eroded, when there is no general acceptance that decisions have been properly arrived at, the relationship becomes illegitimate."

Robert Cox, as quoted in Understanding Newspapers (a book I happen to be reading currently) 

I thought I'd try and write something about what seems to be going on this AGM season. First there is pay - defeat at Aviva, along with big votes against at companies like Inmarsat and Barclays, and plenty so far clocking up 20% plus against (plus also Cairn Energy pulling a share award earlier). There are also what look to be shareholder-pressured board changes at Astrazeneca, Trinity Mirror and BSkyB. And we may yet see more.

It's early days, and I'm wary of falling into the trap of taking a handful of cases as representative. It will be useful to see some actual data on, say, average votes against resolutions at AGMs for the 6 months to the end of Q2. But it does seem like something has shifted, and it could be quite significant. Shareholders, which in practice means asset managers, seem more willing to push companies hard where they disagree than they have been before. (As an aside I think I can spot a couple of asset managers whose voting stance has shifted, but will have to wait until we have some more data on that one.)

A few things are driving this. In part a pushback on pay in particular has been in the post since the crisis hit. One thing even mainstream portfolio managers hate is paying out when the performance isn't there. This is not what people usually mean by 'rewards for failure', which is typically applied to cases of directors being paid off to leave when they've messed up. But, not unhelpfully, paying out bonuses when the performance has been poor is now starting to attract the same label, which must irritate the business lobby no end given the way they have tried to frame the exec pay issue.

Secondly, institutional shareholders are, of course, under a lot of pressure to improve their own performance. They have been accused of acting like absentee landlords and initiatives like the Stewardship Code are an attempt to encourage a more active approach. Despite the change in Government, the public policy background is the same - hence Vince Cable's support for the wave of sparky AGMs, and his attempt to give shareholders more powers. More broadly there is a sense that the public aren't too happy about people like Bob Diamond continuing to trouser a lot of money even when they say their company hasn't done well.

As a result, the background to the current season has never been more supportive for a more combative approach from institutional shareholders. When both the editor of City AM and people on the Left are welcoming what is going on something is happening. From the Left perspective it obvious these corporate fat cats are getting paid too much money and it's good that anyone is trying to do something to tackle it. From the Right the argument is somewhat different,  basically since they believe that shareholders are the only legitimate voice in executive pay apart from management, if shareholders are kicking off than that must mean something is wrong. I don't think, so far, I have seen any business comment pieces say anything other than this wave of protests is A Good Thing.

The knock-on effects could be interesting. First, to go back to the quote at the start, this is eroding the legitimacy of board authority in some cases. If you are telling shareholders that really you have no option but to pay bonuses despite poor performance (the Marcus Agius line) and they are still voting against you in large numbers then you are losing your authority. Shareholders have given companies the benefit of the doubt when it comes to executive pay for a very long time. The pendulum appears to now be swinging sharply in the other direction. In addition, to return to the City AM type perspective, if you've been arguing for years that exec pay is a matter for boards and shareholders only, once shareholders start opposing that legitimises others' complaints about top pay.

Secondly, I think having crossed a certain point this will make it easier for shareholders to go further. As I've argued repeatedly over the years, too many asset managers undervalue the votes that they have, and rarely use them to challenge boards even when they have concerns. This year's AGM season is different because, finally, some asset managers seem more willing to use the power they have always had and vote against. Look what an impact it seems to be having (we've already seen companies worried because of the Aviva vote). And once you've voted down one company, it becomes that much easier to do it again. Perhaps herd instinct can work in our favour on this one.

Thirdly, this will probably also lead to more scrutiny of shareholders. I have lost count of the number of media calls recently asking me what's driving the apparent spike in opposition. I think we're going to see much more interest in how shareholders approach these issues and who actually walks the talk. With big well-known companies like Aviva and Barclays in the firing line I think there's a public interest in how 'ownership' is exercised. More generally, the irresistible trend towards transparency as an aid to accountability will come into play. I don't think the stock line that "we achieve more behind closed doors" is going to be good enough in future. There will be more of an expectation that investors should speak out publicly. Again this is not before time.

But my overall impression is that the biggest effect is the erosion of the authority of the boards of those companies affected, and of the business lobby as it continues to seek to hold back the tide. I have no doubt that this may be limited in impact and duration, but it's worth keeping an eye on.