Afren defeated, again

Afren saw its remuneration report voted down today. It was a stonking vote against, almost 80%, and is the first remuneration report defeated this year (not the first defeat on pay this year though). It comes after a bit of commentary on the lack of a Shareholder Spring 2.

However it's also the second time that Afren has lost the vote on its remuneration report, having also been defeated in 2011. I think that this is the first company to lose the vote on its remuneration report twice since the requirement to have a vote came in at the end of 2002.

But actually Afren's history of pay revolts goes further back. As I blogged back then, in 2010 although its remuneration report passed on a straight for/against split, if you include abstentions then the vote in favour dropped to 40%.

Luckily though, two defeats and a near miss in the past four years have clearly made the company sit up and take notice. As they say today "Our remuneration philosophy reflects the need to retain the most able people in a highly competitive talent market and we will provide appropriate rewards for exceptional achievement leading to the long-term increase in Company value."

Err...

More signs of progress?

I had a quick look at the voting and engagement policy adopted by NEST (available here) and was interested to see this line about executive pay.

The heavy linking of pay to performance for already high achievers is unlikely to produce the motivational drivers that investors want executives to be energised by.

To state the obvious, policy doesn't not equal practice - certainly not when it comes to some asset managers in my experience - and this is just one sentence in a large doc. But you wouldn't have found a sentence like this in any investor's corp gov policy even two or three years ago. Now, in addition to NEST, there are bits on the motivational aspects of pay in docs published by Hermes, LAPFF and BlackRock and maybe others I am not aware of. (As an aside, it strikes me that an obvious next step is for the Corporate Governance Code to be amended.)

In addition, as I've previously blogged, the rem consultants are alert to a shift in thinking. PwC have gone by far the furthest, really questioning the value of incentive pay for execs, and making the point that linking reward to performance tends to push the overall level up.

I think we'll also start to see greater policy focus on this as an issue and I personally hope that Labour gets stuck into it.

In the three plus years I've been blogging/reading/thinking about this in detail I can definitely see there has been a shift in opinion, and this is becoming more pronounced. Given the way performance pay is embedded into unthinking UK corporate governance practice this is a long-term battle, and it is still very early days. But in the battle of ideas about pay I think we're making some progress.

Turkey

While all eyes are on Turkey, it's worth remembering that this is a country where there have been alleged abuses of workers' rights in a major global company - Deutsche Post DHL. Text below from the ITF website about questions raised at last week's AGM.

DHL provides “unsatisfactory” answers over workers’ rights abuses
31 May 2013

Deutsche Post DHL provided “unsatisfactory” answers to the barrage of criticism and questions about its record of workers’ rights abuses from shareholders at its AGM in Frankfurt, Germany on 29 May, according to the ITF.

The ITF and UNI Global Union led the charges against the company, both inside the AGM and at a protest outside with members of the ver.di union and the Turkish community. Journalists at a press conference beforehand heard accounts from Aysel Simsek, a DHL Turkey employee who believes she was unfairly dismissed, and senior representatives of the ver.di and Tumtis unions, ITF and UNI. 

The ITF and UNI claim that the logistics giant would never dare commit in Germany the abuses it practises elsewhere. They have evidence that the company has backed fake unions and unlawfully fired workers in Turkey; used lie detectors against staff in Colombia, Panama and South Africa; and relied on agency workers on lower wages and with no job security in the UK, Malaysia, Indonesia and India.

Speakers at the AGM included ITF global head – supply chain and logistics Ingo Marowsky and UNI Europa post and logistics officer Cornelia Broos.

Marowsky commented afterwards: “The company’s behaviour in many countries where it operates risks alienating shareholders and clients. Around half the speakers at the AGM raised the issue of workers’ rights. Yet it became shockingly clear that not only is Deutsche Post DHL failing to implement its corporate social responsibilities and corporate governance responsibilities but it doesn’t even seem to know what’s going on in its own operations.

“For example, the chief executive officer, Frank Appel, doesn’t know how many unions or works councils they’ve got. They don’t track industrial problems. Court cases apparently ‘just happen’ in such a large company. They are not up to speed with events in DHL Turkey, don¹t want to share their investigation of events there and claim they don’t need a joint investigation.  Such unsatisfactory responses do not inspire confidence.”

Marowsky added: “It was interesting to hear Appel admit that under Turkish law DHL does not have either a recognised union or a collective bargaining agreement. The company has denied up till now our claims that it didn’t have a proper union or CBA in Turkey.”

The ITF and UNI, working with the International Labor Rights Forum and SumOfUs, have raised these matters with several major DHL customers, including Adidas, Apple, IKEA and Marks and Spencer, who have put these concerns directly to DHL.

For more information on the DHL campaign visit ‘respect at DHL’ or the ITF’s campaign page.

A few things Labour could do

Thought I'd sketch out a mixture of what Labour has committed to in the corporate governance area, what could be broadened out, and a couple of additions...

Stick with existing policy as set out in the 2010 manifesto

Tougher rules on takeovers - a higher threshold to approve deals, a qualifying period to vote on them, exploration of public interest test.

Mandatory voting disclosure - won't repeat myself here, but most important thing is to agree the disclosure framework. Who should it cover, how and when should they disclose?

Broaden out existing commitments

Labour is committed to employee representation on rem comms - why not open this out in the shape of a broader review into corporate governance? This could include both employee voice, looking at how representation on boards - not just rem comms - could work, and shareholder engagement (the Swedish nom comm model).

Extra bits

Undertake a proper review into pay, including research into the effectiveness of executive pay (does it improve performance?). There is plenty of evidence that the large proportion of variable pay executives receive is unlikely to 'work', and, in my opinion, performance-linkage instead principally serves to make high pay less open to challenge (that may be its real purpose now). Lots people in the system don't buy that it works, so why continue with it?

Make it easier to file shareholder resolutions. Drop the filing threshold to say 1% and let filers combine to meet it - eg two investors with 0.5% each.

Encourage beneficiary empowerment. It is striking how even now beneficiaries have almost no formal representation within the financial system's architecture, or when reform is undertaken. Look back at the range of people involved in the Wilson Committee, could we establish a standing body with similar stakeholder representation to look at governance/ownership issues?

Exhibit more scepticism in the face of lobbying - trade bodies will tell you that practically any reform will have disastrous unintended consequences, yet these claims often prove to be false. In addition, if we're serious about 'responsible capitalism' we can't let investor trade bodies have too much power in determining policy.

Fidelity Tory funding update

It's been a long time since I blogged about Fidelity. They are still funding the Tories - according to the Electoral Commission register Fidelity gave them £100k last year, and according to They Work For You they continue to employ Sir John Stanley as an adviser (looks like he got about £20k off them last year). They don't seem to have sponsored any more Enterprise Forum events.

Labour and takeover policy in 2010

OK, here's what we said in the 2010 manifesto:

We now propose to extend the public interest test so that it is applied to potential takeovers
of infrastructure and utility companies. (1:7)

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needsreform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – twothirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined. (1:9)

In contrast here's what the Cox Review said:

The law on takeovers should be changed, such that all shareholders who appear on the Register during the Offer Period (as defined by the Takeover Code) have no voting rights until the outcome of the bid has been concluded. (p 39)

And as a reminder Lord Sainsbury has suggested a higher threshold should be required for deals to be voted through, and for a qualifying period (ie a requirement to have held the shares for a few years) to be introduced for shareholders in the target company to be able to vote on the deal. 

So our 2010 position covers more ground than either of the subsequent suggestions.

High pay is dangerous

Another interesting paper, available here.

Performance for pay? The relation between CEO incentive compensation and future stock price performance

Abstract
We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as over investment and value-destroying mergers and acquisitions.