Pressure is building for a renewed 2016 Shareholder Spring

7 min read

24 May 2016

2012 was the year it rained, save for those few brief weeks when London hosted the Olympic Games. However, for the investment community the year is remembered for the awakening of investor disquiet through the annual general meeting season, the Shareholder Spring.

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Shareholders won the argument that non-executive directors alone (in the form of the remuneration committee) should not be left to their own devices to keep the pay of executive directors under appropriate scrutiny and control. The UK government resolved to take action and put in place a new remuneration reporting regime for listed companies (not including companies with securities admitted to trading on AIM or the ISDX Growth Market).

The new regime, which has been in place since October 2013, was intended to provide additional information to shareholders and to increase transparency required additional narrative information and was built around two key shareholder votes:

(1) An annual advisory vote on a new-form remuneration report; and
(2) A binding vote every three years on a three year prospective remuneration policy.

The new regime for listed companies came into effect in the 2013-2014 voting season. For those who might struggle to find where this package is contained, it can be found in two places. Firstly, the narrative reporting regime of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) (as amended, most importantly by SI 2013/1981); and the remuneration voting requirements contained in the Companies Act 2006 (as a result of amendment by the Enterprise and Regulatory Reform Act 2013).

As the blossoms appear this spring and the mercury creeps upwards, pressure is building for a renewed 2016 Shareholder Spring. A number of major companies have failed to secure the support of investors for remuneration packages.

Disquiet seems to exist on two key grounds: quantum being too high and the apparent regular exercise of discretion in favour of the executive. More general criticisms have included a failure of companies to link remuneration with meaningful contribution, the effect of complexity, in particular the tendency of long-term incentive awards being both opaque and setting an inappropriate risk appetite.

In this final year of the first triennial cycle we have already seen significant votes against the remuneration report of major companies. Anglo-American’s CEO’s salary just scraped through and the £14m package for BP’s CEO was voted down. We have also seen significant votes against the remuneration report of major companies, including rejection by the shareholders of each of Smith & Nephew, Weir Group and Shire. Each of these companies sought approval of packages within the scope of an already approved policy.

Once the 2016 AGM season wraps up, companies will need to start to engage shareholders on new three year policies for 2017-2020. A prudent remuneration committee chair seeks to stay out of the limelight and will be watching the actions of investors, whether or not in relation to the companies in which they are involved in the hope that their 2017 -2020 arrangements and 2017 pay award can fail to attract attention.

Read on to find out what this means for future business, as well as how SMEs can demonstrate good corporate governance.

Remuneration policy should be consistent with effective risk management policies. Performance metrics should relate to the company’s articulated strategy and risk tolerance, thereby aligning the interests of executives with the interests of long term investment money. Any good remuneration package will reflect an alignment of interests between the executive and the shareholders, incentivise through challenging performance criteria and deploy appropriate claw back arrangements which focus the mind.

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A failure to secure the support of shareholders indicates that there may be a tough road ahead for those who set pay for executive directors. However, there are a number of initiatives to support a better dialogue. The Executive Remuneration Working Group of the Investment Association has embarked upon a project to encourage simplification of pay practices for companies on the UK markets. 

The Investment Association is hopeful that it can drive a change in behaviours away from the complexity and potentially distortive effect of Long-Term Incentive Plans, believing such plans to often result in a poor alignment of interests between executives and shareholders.

The Quoted Companies Alliance, which supports companies outside of the FTSE 350 is a clear voice for transparency, proportionality and simplicity and has recently revised its “Remuneration Committee Guide for Small and Mid-Size Quoted Companies“, focussed on companies having an open and frank engagement with shareholders on remuneration issues and putting in place packages which can be well understood by both executives and shareholders. 

In addition, ShareSoc, the body which supports individuals who invest directly in the stock market, has created a document setting out the expectations on pay for its members which, again, repeats the call for good engagement, removing unnecessary complexity, and ensuring a good alignment of interests.

What is key is to have positive engagement with shareholders. Shareholders who understand the thinking of a remuneration committee are likely to be better inclined to support its awards. In an environment where packages are inevitably smaller than for the larger listed companies there is a real possibility of smaller companies being able to set a better example to their larger cousins on our public markets.

Edward Craft is a partner at Wedlake Bell.