Brian Peart used to jump on the train 60 times a year to go to the annual
shareholder meetings of Britain’s biggest companies. The 73-year-old retired
builder from Durham ploughed most of his life savings into blue-chips like
Lloyds TSB, HBOS, Barclays and Royal Bank of Scotland.
He had always prided himself on being an active, engaged shareholder – part of
the band of silver-haired investors guaranteed to administer globe-trotting
bosses a dose of reality for at least a couple of hours every year.
“I didn’t go to whinge. I wanted to be constructive and show a real interest
in the businesses and the directors who were running them,” said Peart.
In the past 18 months, life has changed irreparably. The blow-up at Britain’s
banks, combined with losses on other investments, has wiped out two-thirds
of Peart’s savings. Disillusioned with share ownership, and with less cash
to spend on travel, he now goes to only 10 annual meetings a year.
Like a growing number of institutional shareholders, Peart is furious at the
way large companies are being run and the huge rewards doled out to their
top executives despite poor performance.
“At annual meetings you get told so many stories – very often untrue – that I
am more inclined to stay at home and read company accounts more closely and
not go to as many meetings,” said Peart. “I’m really angry and frustrated.”
He is not alone. Institutional shareholders, who rarely show up at annual
meetings, are making their feelings clear. Stung by the sight of directors
paying themselves sky-high sums despite distinctly middling performances,
they are making 2009 one of the stormiest annual-meeting seasons for years.
Already investors have registered big “no” votes against a string of pay deals
at blue-chip companies, including Xstrata, BP, Pearson and Royal Bank of
Scotland. In the next few weeks furious debates will rage across the stock
market from giants such as Royal Dutch Shell, Next and Thomson Reuters to
smaller businesses like Galiform, the joinery group that plans to pay
Matthew Ingle, its chief executive, more than £1m in salary and bonuses
despite plunging into the red.
“We are witnessing a real pickup in the level of dissent at annual meetings,”
said Jean-Nicolas Caprasse, head of governance in Europe and the Middle East
for the proxy voting agency Risk Metrics. “It used to be that shareholders
would agree to vote in favour of the remuneration report even if they had
doubts over an aspect of it, but now they are more willing than ever to
express their dissatisfaction.”
Michael McLintock, chief executive of M&G, one of Britain’s top three
investment institutions, told a conference hosted by the Association of
British Insurers and the CBI that shareholders had not “covered themselves
in glory” in the run-up to the recent crisis. He expects investors to be
tougher and quicker to work together to build a common approach on important
issues.
The only surprise appears to be that companies are unprepared for the attack.
“It does seem bizarre – the lack of sensitivity to shareholders’ feelings
given how much the world has changed,” said Richard Buxton, head of UK
equities at Schroders.
WILL ETHRIDGE has made steady progress since joining Pearson in 1998 following
its acquisition of Simon & Schus-ter’s school and college publishing
business in America. From running its higher-education and professional
divisions in the US, he was promoted to boss of the entire North American
education arm last year – the group’s profit engine.
Ethridge, 56, was tipped as a long-shot to succeed Dame Marjorie Scardino as
group chief executive when she eventually retires. On May 1, however, he
attracted the wrong sort of attention. An £810,000 bonus with a
discretionary element for thrashing out a books deal with Google over the
course of two years made him the unlikely target of a campaign against pay
policy at Pearson. A third of the votes cast failed to support the
remuneration report.
Such tough action would have been rare five years ago. In 2009, it is becoming
commonplace. In the past two weeks, the property website Rightmove, Frankie
and Benny’s owner The Restaurant Group and the doorstep lender Provident
Financial have suffered stinging rebukes for loading up management with pay
rises and bigger potential bonuses in straitened times.
“It is surprising that companies and their advisers appear slow in
appreciating the changed circumstances surrounding remuneration
arrangements,” said Robert Talbut, chief investment officer at Royal London
Asset Management. “Institutions are far more hawkish on companies attempting
to push the envelope or plead special circumstances.”
Of course, investors are acting after being criticised themselves. In recent
weeks Lord Myners, the City minister, and Hector Sants, chief executive of
the Financial Services Authority, have accused fund managers of not having
done enough to prevent the banking collapse.
The same is true in America, where Ken Lewis, boss of Bank of America, became
the highest-profile victim of the backlash last month. Shareholders voted to
split his role as chairman and chief executive, weakening his grip as the
bank struggles with the aftermath of its ill-timed takeover of Merrill
Lynch. It was the first time shareholders had forced a company in the
Standard & Poor’s 500-stock index to split the roles of chairman and
chief executive, according to Risk Metrics.
Regulators and politicians are piling on the pressure. Mary Schapiro, recently
appointed chairman of the Securities and Exchange Commission, has said she
favours “say on pay” rules. Last month Senator Charles Schumer said he would
soon introduce a bill requiring that investors be allowed to vote on
executive compensation and golden parachutes. He also wants companies to
split the roles of chairman and chief executive. Barack Obama introduced a
similar bill in the Senate in 2007.
ONE thing is for sure. The global banking collapse has highlighted the fact
that salaries and performance have decoupled across a range of industries.
According to Risk Metrics, the average cash remuneration for executives at
large European firms rose 74% between 2003 and 2007, equivalent to a
compound annual 14.9%.
How, though, is pay going to be policed? The voting down of pay reports
delivers a bloody nose and bad publicity but often nothing more for
companies that have become repeat offenders.
Putting remuneration to the vote is not obligatory in Britain. In the
Netherlands and Sweden, however, it has become binding. And rather than
voting in retrospect, investors have a say in substantial changes in pay
policy. Philips, the electronics giant, and Ericsson, the Swedish telecoms
equipment maker, have already been forced into rethinks after shareholders
protested.
The European Commission is taking a keen interest. Last month it rushed out
guidelines on capping executives’ golden parachutes. For now, it is up to
member states to decide on the pay vote.
Peter Montagnon, head of investment affairs at the Association of British
Insurers, argues that some companies are already showing restraint and
instigating pay freezes.
Reckitt Benckiser, the household products giant, reduced by 25% the share
options and performance shares awarded to its chief executive, Bart Becht.
Andrew Witty, boss of the drug-maker Glaxo Smith Kline, “rebased” his pay to
reflect the fact that he works in west London, not Philadelphia, as his
predecessor, Jean-Pierre Garnier, did. However, he was still awarded shares
worth five times his basic salary.
The debate on pay is leading to a wider discussion on boardroom behaviour. The
Financial Reporting Council has put out a consultation document to examine
the Combined Code, drawn up to guide companies on boardroom best practice.
Some argue that reform should target the make-up of the boards themselves,
including directors who are meant to police the performance of executives.
The Corporate Library, an independent US research firm, identified the
problem of “overboarding” in a recent analysis. It raised fears that
directors who sit on too many boards contribute to poor corporate
governance.
Peter Butler at Governance for Owners agrees. “Nomination committees and
headhunters are too narrow in the specifications they give when they
recruit,” he said. “They are comfortable in having someone who is a chief
executive elsewhere on their board, but if that person has filled every hour
of every day in normal times, what can they do for you in crisis times?”
Robert Jenkins, chairman of the Investment Management Association, wants
investors to “put a body on the street when engagement fails”. “Voting
directors down is likely to do more for governance than all the code
revisions in the realm,” he said. “Boards don’t own the companies in which
we invest. Our clients own the companies in which we invest. It is not the
board’s money. It is our clients’ money. I would encourage active managers
who hold the shares to engage. And I would encourage all shareholders who
engage to vote down directors of companies they judge to be to be poorly
run. Hold them accountable. Who else will?”
With his armchair view of the world, Brian Peart is delighted that at last the
institutions are biting back. “Without doubt it is a good thing,” he said.
“They should have been doing their jobs, voicing their opinions and trying
to guide companies long before. Unfortunately too often they would guide
them down the wrong road or didn’t say anything at all because they didn’t
want to ruffle any feathers.” Additional reporting by Dominic Rushe in New
York
Annual meetings that face rebellions over excessive boardroom pay
Thomson Reuters
Date: May 13
Location: Thomson Reuters building at Canary Wharf
Key figure: Niall FitzGerald, chairman of the corporate-governance
committee
Issue: Hefty stock awards. Tom Glocer, chief executive, was awarded
options worth $26m (£17m) as part of a $61m boardroom incentive package at
the newly merged group. Even Stephen Dando, HR director, gets an extra
£300,000 simply for staying with the company until October. There is no
chance of the remuneration report being voted down, though, as the Thomson
family’s investment vehicle, Woodbridge, owns 55% of the group.
itv
Date: May 14
Location: Queen Elizabeth II Conference Centre at Westminster
Key figure: Sir James Crosby, senior independent director
Issue: Michael Grade, ITV’s executive chairman, has averted a
full-scale rebellion by agreeing to stand back from a full-time role by the
end of the year, but the knives will still be out after the board awarded
themselves bonuses worth 29% of their salaries at the end of a dreadful
year. Crosby is the main conduit for shareholders to air their grievances
and will be remembered by many small investors in the room as the chief
executive who sent HBOS on the path to destruction.
Shell
Date: May 19
Location: Circustheater, The Hague, with a video link to the Barbican
Centre in London
Key figure: Sir Peter Job, chairman of the remuneration committee
Issue: The oil giant Shell is a repeat offender. Measured against the
investor returns of four rivals, Shell is ranked fourth, which means that
its incentive scheme should have paid out nothing. However, the remuneration
committee, which is led by Job, ripped up the rules to hand out shares worth
half executives’ salaries. The committee was also in hot water only a year
ago for awarding bonuses to directors who had stayed on.
NEXT
Date: May 19
Location: Belmont Hotel in Leicester
Key figure: Simon Wolfson, chief executive
Issue: Clothing retailer Next rewrote its bonus scheme halfway through
the year, which allowed directors to pocket an extra £350,000, whereas,
before that, they would not have got anything. The changes infuriated the
Association of British Insurers, which put out a “red top” note on the
company, highlighting that it thinks it has broken the rules. Wolfson
insists that leading shareholders were consulted on the scheme last summer
and had no objections.
Lloyds
Date: June 5
Location: Scottish Exhibition & Conference Centre in Glasgow
Key figure: Sir Victor Blank, chairman
Issue: Lloyds painted itself as the saviour of British banking when it
acquired HBOS last year but mounting writedowns from its toxic loan book
have turned the deal sour. Investors are looking for a scapegoat, probably
Blank. They are also concerned that, after bankers were warned to rein in
big bonuses, chief executive Eric Daniels can still make up to £2.2m in an
annual cash bonus and £2.1m in share awards. Some bonuses can, however, be
clawed back.
