4 September 2019
When Theresa May was campaigning to become Prime Minister, she made clear her resolve to tackle executive pay and the problems it creates. Sadly, she failed to make much of an impression. A recent analysis from Proxy Insight reportedly suggests that placing companies on the Investment Association’s List of Shame when there is a pay revolt of 20% or more is failing to have the desired effect. Indeed, the naughty list is perhaps becoming a badge of honour for some remuneration committee chairs.
There is no single silver bullet that will bring a fair and lasting solution. But what is now becoming clear—and arguably has been for years—is that the incremental approach of one bullet at a time is not the right way to proceed. Rather, what is needed is a package of measures that are applied and enforced in a transparent, rigorous way. So, what might these measures look like? Let me offer a few ideas.
First, AGM pay resolutions should require a 75% majority, rather than just 50%, as is currently the case. This super-majority approach may offend some governance purists, who are wedded to the concept of a simple majority, but we have a chronic problem that needs a radical solution. By having a super-majority requirement, remuneration committees will be much more sensitive to the views of shareholders and this should, across the market, strengthen their hand in negotiating with management. Some naysayers will point to the problems that could arise if there is an activist or dissident shareholder who has 25% or more of the voting rights and could hold the board to ransom in return for their support. This issue needs to be addressed but it is one that can be solved—where there is a will there is a way.
Second, the voting and engagement of institutional investors, activists and hedge funds must come under much more effective enforcement and sanction by regulators. The long-promised dawn of a revised UK Stewardship Code will soon be upon us. When the Financial Reporting Council launched its consultation in January this year, it claimed to have sought feedback from 170 members of the investment community, so its proposals should have been a slam dunk. Perhaps some of the criticisms levied publicly by the late Peter Montagnon, who, before his untimely death in June, argued for the primacy of fiduciary responsibility over the proposed litany of box-ticking provisions, may have gained traction—that might be, in part, a fitting legacy. Over and above the structural reforms that are underway, such as the abolition of the FRC, it is pleasing to see the Financial Conduct Authority—the one regulator which has bark and bite when it comes to the conduct of institutional investors—now taking a serious interest in investor stewardship. That said, the proof of the regulatory pudding will be in the enforcement eating.
Third, more transparency is required about the consultations that take place between remuneration committees and investors. Currently, this is shrouded in secrecy. A company’s annual report should contain a granular account by the remuneration committee describing its consultation process: it must lift the cloak of invisibility and pull no punches. It should name the investors who were consulted, set out what issues were raised and how they were resolved. If investors failed to respond—a complaint often levied by remuneration committees—then they should be named and shamed. This information should be reviewed by the auditors to provide assurance that no corners are cut and that it is fairly presented.
The public interest in executive pay—and the social as well as corporate issues it generates—is undeniable and it has the potential to lead to significant unrest. The incremental approach to addressing the root causes have consistently failed to resolve the problems of excess, largesse and disparity. Indeed, some may say it has served to exacerbate the problems and I am inclined to agree. The status quo must not be allowed to continue and it is high time for some joined-up thinking to grasp the nettle of executive pay and reimagine an approach that upholds the values and principles which will deliver just deserts.
Guy Jubb is an Honorary Professor at the University of Edinburgh Business School. He currently chairs the European Corporate Governance Institute, and is former Global Head of Governance & Stewardship at Standard Life Investments.