Archive for June, 2016|Monthly archive page

Executive remuneration

For many years executive remuneration has been one of the ‘hot topics’ in corporate governance. Each year there is a furore around executive remuneration with the remuneration of CEOs often being a particular area of contention. This year we have seen the spotlight focussed on the remuneration of CEOs at high profile companies such as BP and WPP resulting in much shareholder comment and media attention.

There has been a lot of shareholder dissent this year over the executive remuneration packages at FTSE 100 companies. David Oakley, Michael Pooler and Scheherazade Daneshkhu in their article ‘UK companies switch to listening mode as heat rises on top pay’ (13 May 2016, Financial Times) state ‘Some of Britain’s largest companies are preparing for a summer of tense consultations on executive pay after one of the biggest waves of shareholder protests since votes on remuneration were introduced in 2002’. They highlight the top ten protests of 2016 (measured by % votes cast against remuneration packages) with BP, and Smith & Nephew receiving the highest levels of votes against, followed by Shire, Anglo-American, Devro, Aberdeen Asset, Lakehouse, SDL, Bunzl and Thomas Cook.  However, the votes against were in the majority only at BP, and Smith & Nephew, though the level of dissent was significant and sufficiently high to give concern to boards and remuneration committees at all of the companies listed in the top ten protest votes.

The interesting case of Lloyd Blankfein, Chairman and Chief Executive Officer at Goldman Sachs, gave rise to corporate governance concerns on two fronts. Firstly, Blankfein has held the roles of Chairman and CEO since 2006 and secondly concerns over the executive remuneration packages for the CEO and other executive directors. Alistair Gray, in his article ‘Goldman investors revolt over executive pay’ (20 May 2016, Financial Times), reports that shareholders and corporate governance advisors, such as Institutional Shareholder Services (ISS), were concerned that the costs of a multi-billion dollar legal settlement relating to mis-sold mortgage-backed securities before the financial crisis were not taken into account when determining executive remuneration. He highlights that ‘about a third of votes were cast against the remuneration of top managers……[and] a proposal to separate the roles of chairman and chief executive after Mr Blankfein steps down received a similar level of support’. Nonetheless, around two thirds of shareholders supported the executive remuneration plan; the fact that Mr Blankfein and other top executives each took a 1$million pay cut in 2015 may have influenced this voting outcome.

Of course, there is also concern over executive pay in many other countries. For example, recently the French government has taken action to give shareholders more power over executive pay.  Anne-Sylvaine Chassany’s article ‘French shareholders win say on executive pay’ (10 June 2016, Financial Times) highlights how a dispute at Renault between shareholders and the board of directors over executive pay contributed to a ‘UK-inspired provision in the Socialist government’s anti-corruption bill [which] will allow shareholders to vote on the pay packages of chief executives when they are hired or when the structure of their compensation changes. But it goes further than the UK say-on-pay approach by also allowing them to turn down the variable part, which is tied to companies’ annual performance, every year’.

It is clear that concern over executive remuneration packages will continue to generate shareholder dissent. The increasing emphasis on shareholder engagement should contribute to institutional shareholders in particular taking action against executive remuneration packages which are seen as over-generous – especially in cases where companies are underperforming.

Chris Mallin, June 2016

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