Big vote against FTSE100 pay

Despite heavy pre-match billing, Shareholder Spring 2 hasn't really taken off yet, much to no-one's surprise. We had quite a few AGMs last week, and I couldn't really see much of note at any of them.

However, today we had a decent one - a 39% vote against a one-off share award to the chief exec at Randgold Resources, see resolution 17 here. That's sizeable in any year. So, if you were the company how would you react? A) Acknowledge the scale of the revolt and state that you take investors' concerns seriously or B) try and claim it as a win?

Judging by what they said to The Guardian, the company has opted for B)

"Considering that several of the proxy agencies advised shareholders to oppose the award the board is gratified that a large majority of shareholders recognised the merits of the award."

Votes against management are (not) a sign of failure

An argument you hear trotted out with reasonable frequency by people on the investor side of the corporate governance relationship is that we shouldn't get too hung up on votes against management because they are often/ultimately a sign of failure.

According to this view, what we should be aiming at is ongoing dialogue between companies and shareholders, primarily out of the public eye. If there really isn't a way to resolve a disagreement then, regrettably, a voice against may be in order.  

Having worked in this field for quite some time now I think this is a really troubling way of looking at the world. Imagine if we applied this approach in politics - votes against our MPs and councillors are a sign of failure, what we should be aiming at is seeing our representatives re-elected (like they are at PLCs) with 99% in favour. Anything less must mean the process of being ruled has failed. Or, closer to home, what about relations in the boardroom? Presumably we should be aiming at unanimous decision-making, and any dissent within the board is a sign of a problem. It sounds ludicrous doesn't it?

In any field where power is exercised there is - or should be - dissent. We should value the expression of such dissent, not characterise it as a problem. You do hear this from politicians, some worry when there isn't a coherent opposition facing them to challenge them. Similarly, surely investors recognise that boards where there clearly isn't internal challenge are not what they want. So why consider that the expression of dissent by investors, using the most appropriate signal they have - the vote - is a bad thing?

Sometimes people just disagree - they have different views/beliefs etc - and their opposing viewpoints cannot be reconciled. In such a scenario it is entirely right for one party to signal "I disagree with you". At some point we may have to find a way to deal with the competing claims, but for one party to simply state "I disagree" does not represent a failure.Consider, for example, Church groups who take a moral position on the level of executive pay. If they vote against the remuneration report of a company where they think pay is too high is this a sign of failure?

In my opinion, in all these sorts of cases the idea that our aim should always be to reach a consensus is a bit silly in theory, and disempowering in practice. I personally think that in these environments we should always expect tension (because we are dealing with the exercise of power) and this is actually a good thing. In contrast, "consensus" may often really mean "acquiescence". I think if we look at the limited exercise of power by shareholders in recent years it is the times when they didn't vote against which are by far the most troubling.

Votes against management are, first and foremost, a sign of dissent and dissent in the environment in which corporate governance people work is a good thing. It is when there is a widespread lack of dissent that we should get worried.

I don't agree with Golden Hellos, but...

In a previous post I flagged up pressure on Astrazeneca over the payment of a 'golden hello' to its new chief executive. To state the obvious, such payments are not performance-related, since they are made in advance of performance. And the one thing even the most conservative asset manager believes these days is that pay should be linked to performance.

As such you's think this would be enough reason for shareholders to oppose the remuneration report, especially since the vote is only advisory, the payment has already been made, and hence this is really is just a protest vote. Right?

Nope. The FT contacted a couple of big Astra shareholders and here's what they said

A top 10 shareholder at AstraZeneca said it was looking more closely at remuneration and was concerned about special payments such as golden hellos and golden goodbyes. However, it said it would be backing the remuneration report. A person from another top 20 shareholder said he was increasingly concerned about golden hellos, although he refused to say how his organisation planned to vote on the remuneration package.

So "concerned" and "increasingly concerned" by these kinds of payments, but neither can commit to use their advisory vote on remuneration policy to indicate this concern. I imagine the company will think twice about paying another Golden Hello haveing experienced this ferocious onslaught...

Another interesting pay revolt

At Jupiter this time. A 31.5% vote against is a pretty big deal, though it may look a bit tame compared to last year. It's a shame it's them in a way, as Jupiter are certainly amongst the better asset managers when it comes to tackling issues at investee companies. The Grauniad makes the link to Jupiter's opposition to a bonus cap (which they don't have).

Personally I think the most significant point is that it highlights that those that police executive pay at PLCs are quite well paid themselves and sometimes have worse practices. Jupiter isn't the first asset manager to feel the heat over exec pay - it has happened to Aberdeen and, I think, F&C too.

The other point broad I would make is that asset managers generally have views that are towards the extreme end of the range of views on executive pay. They are much more willing to think that in the "war for talent" you have to pay pretty much whatever the execs want in order to secure their services.

So executive pay is set by directors, who are highly paid and, broadly, consider that current levels of executive pay are acceptable. This is then overseen by (mainly) asset managers, who are highly paid and, broadly, consider that current levels of executive pay are acceptable.

There are very few voices suggesting that pay is too high (not just insufficiently linked to performance) either in the pay-setting process at the company, or the approval process amongst institutional shareholders. It's largely an echo chamber. Highly paid people who don't really see the problem talking to each other. And as we know from Cass Sunstein, when people of like minds talk to each other they push their views further to extreme.

Is it any surprise that our current corporate governance model produces the results it does?

Quick links

Blogging light to non-existent due to AGM season, so here are a few things I saw elsewhere.

1. Worth checking out the High Pay Centre blog for speeches from this week's event. Following it on Twitter it was notable that there was quite a bit of sceptical comment about incentive schemes, LTIPs in particular and variable pay in general. RLAM's Robert Talbut said that variable pay should be a smaller proportion than it is (but easier to get!). I do wonder if the supertanker is starting to turn.

2. A quick AGM result - Hunting PLC scored a 22% vote against its rem report. Still early days, obviously, but not many notable votes so far.

3. A couple of LAPFF initiatives - Astrazeneca (Golden Hello) and National Express (labour standards). 

Shifting the corporate governance debate

I blogged a couple of weeks back about the emergence of Trade Union Share Owners, something which I hope represents a potentially important development. Obviously as someone who has worked for and is very sympathetic to the trade unions you might not be surprised that I like the initiative, so I thought I would explain its benefits in a bit more detail.

TUSO has the potential to link corporate governance policy back to the beneficiaries and away from intermediaries. Regardless of what you think about trade unions I am pretty confident that they are much closer to the investing public's views on issues like executive pay. In contrast, asset managers generally sit at one extreme of the spectrum in the exec pay debate - high pay & all it entails is fine because boards are in a "war far talent". And despite being at the far edge, they currently have a lot of (voting) power. So it's great if we have a group that can express views as investors that, instead,  mirror those of the real providers of capital.

On the same theme, hopefully this group has the potential to broaden out the governance debate, as it takes place in the governance community. Did I mention I'm not a fan of performance-related pay? I may have, but most investors are still in thrall to the idea. The TUSO policy on this issue takes a much more critical approach. Although it only controls a small amount of assets, hopefully by setting out a different set of policies it can pull that Overton window in a different direction, and legitimise ideas that mainstream UK corporate governance doesn't touch currently.

On this point the role of employees is the most obvious thing to mention, but there are two aspects to this. The first is the way that investors consider employment issues. In my opinion, even the RI community does not do this well currently. This is in marked contrast to their willingness to engage on environmental issues. So hopefully employment issues could appear more often on the engagement agenda. But there's also the question of employee representation IN governance. This is crazy talk in the UK, though barely worthy of comment in other European countries. So will this idea start to seem a bit more thinkable?

But aside from the impact on policy, hopefully there will be some direct practical effects too? The unions don't have much money, though hopefully the range of funds involved can expand, but by having their own voting position they can put pressure on particular companies. In addition, this could have a knock-on effect on other investors. It could give heart to others who want to take a slightly stronger line, and it could expose those who don't.

And in the longer term could TUSO also influenced union members who are reps on other funds? There are a lot of these people out there, yet currently they only get to hear a very narrow version of corporate governance policy.

I've always thought that, regardless of your views on the UK corporate governance regime, with its assumption of shareholder primacy, it's a mistake for the labour movement to not use tools in this system that are available to it. I hope this initiative could be the start of something really interesting.

Pay and motivation, yet again

I said (didn't I say?) that I thought we'd start seeing more scepticism about the value of performance-related pay. The HBR piece I linked too is a decent run-through of some of the academic stuff on this, and it's pleasing to see this kind of thing starting to get prominence.

But it's not just a theoretical question. I was in a meeting in a company recently where the board rep didn't even bother arguing that performance-related rewards "work" to increase performance. They accepted our argument that it's basically junk. I suspect that a lot of board members accept this but - as this company suggested - investors don't give them a consistent message, and it's very hard to be the first mover.

Unfortunately most investors haven't really thought at all about the effectiveness of performance pay and most still seem to believe it is an unquestionably Good Thing. The most depressing result of this is investors getting hung up on trying to tie rewards to non-financial factors to try and encourage good behaviour (if you buy the overjustification/motivation crowding stuff this is actually a very Bad Idea).

Therefore, in my opinion, the best thing we can hope to currently is to try and undermine belief in the value of performance-related rewards. If you're interested in joining my little crusade on this topic, here's a list of pretty easy reading books that will give you more ammo...

–      Drive: The Surprising Truth About What Motivates Us – Daniel Pink

–      Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, As, Praise and Other Bribes – Alfie Kohn

–      Not Just for the Money: Economic Theory of Motivation – Bruno Frey

–      Motivation To Work – Frederick Herzberg

–      Why We Do What We Do – Edward Deci

–      The Hidden Costs of Reward - Mark Lepper and David Greene

–      The False Promise of Pay for Performance - James McConvill