Archive for the ‘directors’ remuneration’ Tag

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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Institutional Investors and Corporate Governance Reform

Corporate governance codes and guidelines have long recognised the important role that institutional investors have to play in corporate governance.  As well as being influential in their home countries, institutional investors have increasingly become a more significant force in other countries through their cross-border holdings. Recent corporate governance reforms motivated by the global financial crisis have placed even more emphasis on the role of institutional investors.

Role of Institutional Investors

Back in 1992, the Cadbury Report recognised the role played by institutional investors  stating that ‘we look to the institutions in particular ‘ to use their influence as owners to ensure that the companies in which they have invested comply with the Code’.  Various codes since then have emphasised the importance of the role.  The Financial Reporting Council (FRC) publishes the UK’s Combined Code on Corporate Governance (commonly known as the Combined Code).  The Combined Code (2008), in Section E, identifies three main principles.  Firstly it states that ‘institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives’; secondly ‘when evaluating companies’ governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention’; thirdly, ‘institutional shareholders have a responsibility to make considered use of their votes http://www.frc.org.uk/corporate/combinedcode.cfm The first and third principles relate to two of the tools of governance being dialogue and voting.  All three principles essentially require institutional investors to behave in a responsible and conscientious way, taking all relevant factors into account and making considered decisions.

Corporate Governance Reform

The UK Treasury commissioned the Walker Review of Corporate Governance of UK Banking Industry which reported in November 2009. The Walker Review recommends ‘strengthening the role of non-executives and giving them new responsibilities to monitor risk and remuneration; it also recommends a stewardship duty on institutional shareholders to play a more active role as owners of businesses.’ http://www.hm-treasury.gov.uk/walker_review_information.htm  Kate Burgess and Brooke Masters in their article ‘Institutions urged to adopt tougher stance’  (FT, Pg 21, 26th November 2009) states ‘Institutional investors are being urged to be tougher on company boards by Sir David Walker, as the City grandee adds his weight to pressure for them to take their responsibilities more seriously.’

The FRC’s statement welcoming the Walker Report can be found at: http://www.frc.org.uk/press/pub2174.html. The FRC has agreed to implement those recommendations that it considers should apply to all listed companies. In addition the FRC has agreed to consult on adoption of a Stewardship Code for institutional investors as recommended by Sir David.   

A recent review of the Combined Code http://www.frc.org.uk/corporate/reviewCombined.cfm has however recommended that Section E of the Code (addressed to institutional shareholders) be removed, ‘subject to sufficient progress being made on the Stewardship Code for institutional investors and its associated governance arrangements.’  The Stewardship Code for institutional investors as was proposed by Sir David Walker, and is an area on which the Financial Reporting Council (FRC) will be consulting separately http://www.frc.org.uk/corporate/walker.cfm

The final report on the review of the Combined Code (2008) makes various recommendations which include, inter alia, annual re-election of the chairman or the whole board; new principles for the roles of the chairman and non-executive directors.  Kate Burgess in her article ‘Sir Christopher misses out on succession planning’ (Pg 21, FT, 2nd December 2009) highlights that more emphasis should have been put on succession planning in companies as this tends to be a weakness in many firms.  Moreover it would be beneficial to investors in their stewardship role to have more knowledge of the process in place for succession planning.

Stewardship Code

The Institutional Shareholders’ Committee (ISC) membership comprises the Association of British Insurers, the Association of Investment Trust Companies, the National Association of Pension Funds, and the Investment Management Association.  The ISC has previously published guidance on the responsibilities of institutional investors in 2002, 2005 and 2007.  In November 2009, the ISC published its Code on the Responsibilities of Institutional Investors which is included as an Annex in the Walker Review and which is widely viewed as the basis for the Stewardship Code which will be monitored for the adherence of institutional investors on a ‘comply or explain’ basis.  The ISC states that ‘the Code aims to enhance the quality of the dialogue of institutional investors with companies to help improve long-term returns to shareholders, reduce the risk of catastrophic outcomes due to bad strategic decisions, and help with the efficient exercise of governance responsibilities.’ http://www.institutionalshareholderscommittee.org.uk/ The Code discusses the stewardship responsibilities of institutional investors which include effective monitoring of investee companies and voting of all shares held. 

Effective Stewardship

Of course in order to carry out their responsibilities as shareholders, institutional investors need to be able to exercise their rights effectively – if they cannot, then they may be tempted to exit, i.e. to sell their shares.  An article in the Financial Times, ‘Shareholder rights’ (FT, page 12, 30th November 2009) points out that ‘if selling the shares is a blunt instrument, then removing board members is the sharpest.  More than nine in 10 international investors say the ability to nominate, appoint and remove directors is the most valuable shareholder right.  It is wrong that efforts to boost this power in the US have been delayed by the business lobby.’  Clearly it is in the interests of effective stewardship for institutional investors to be able to exercise their rights.  This will enable them to take action on prominent topical issues such as having a ‘say on pay’ in relation to directors’ remuneration, and removing underperforming directors from the board. 

However another dimension to consider is that of free riders.  Ruth Sullivan in her article ‘Walker plan points finger at freeriders’ (FTfm Pg 3, 30th November 2009) points out that some institutional investors will not engage more with their investee companies and be active owners, rather they will save their time and money and free ride on the efforts of other institutional investors. 

Concluding comments

The recent reforms mooted by the Walker Review and the Review of the Combined Code have made recommendations which will help to strengthen corporate governance in the UK.  The role of institutional investors is seen an important one and institutional investors are being encouraged to engage more fully in their role as owners and adhere to the ISC Code of Responsibility for Investors. 

Chris Mallin 2nd December 2009

Banks in crisis: failures of corporate governance?

Corporate governance has been gaining more predominance around the world over the last decade.  However the last year or so which has brought the financial crisis and the ‘credit crunch’ has seen an unprecedented interest in some of the areas that are central to corporate governance: executive remuneration; boards of directors, independent non-executive directors; internal controls and risk management; the role of shareholders.

However the focus on these areas has brought into sharp relief some of the failings of the present system whether these have been brought about by greed, naivity, or a lack of real appreciation of the risk exposures of banks.

Bankers’ bonuses
Whilst many would agree that bankers have received huge payouts, often for a seeming failing company, bonuses appear likely to be cut, possibly by around 40% or more.  Peter Thal Larsen and Adrian Cox (FT, Page 13, 07/08 Feb 09) in their article ‘Barclays bankers braced for bonus cut’ highlight that even much reduced bonuses are likely to be controversial given that feelings are running high amongst the public and politicians alike.

The generous remuneration packages of executive directors of some of the UK’s largest banks have caught the headlines day after day in recent weeks.  In their article Former executives face bonus grilling’ (FT Page 2, 9th Feb 09), George Parker and Daniel Thomas mention an interesting historical fact ‘in the early 18th century, after the bursting of the South Sea bubble, a parliamentary resolution proposed that bankers be tied up in sacks filled with snakes and thrown into the River Thames’!  No doubt there are those who wish the same might happen today although a grilling before the Commons Treasury Committee may prove to be almost as unpleasant an experience!

Adrian Cox’s article ‘Barclays executives must wait longer for bonuses’ (FT, page 2, 11th Feb 09) highlights that Barclays is trying to design a pay structure that retains staff whilst rewarding long-term performance at a time when banks have been urged to show ‘moral responsibility’ in their remuneration structures.  The pay restructuring will affect not just directors but also senior employees, and other banks including UBS, Credit Suisse, RBS and Lloyds are in a similar position.

Risk Management

‘Former HBOS chiefs accused over risk controls as bankers apologise’ was the striking head of the article by Jane Croft, Peter Thal Larsen and George Parker (FT, page 1, 11th Feb 09).  Under questioning from the Commons Treasury Committee, Lord Stevenson, Andy Hornby, Sir Tom McKillop and Sir Fred Goodwin all apologised for what had happened at RBS.  Part of the questioning brought to light that a former employee had warned the board of potential risks associated with the bank’s rapid expansion.

Risk management is an area that is bound to gain a higher profile given the extent of the impact of the use of toxic assets which many feel were not well understood.

Where were the institutional shareholders?

Lord Myners, the City minister, has urged shareholders to challenge banks ‘Myners calls on shareholders to challenge reward cultures’ by Adrian Cox and Kate Burgess (FT page 3, 10th Feb 09). Lord Myners, they state, said that’ institutional investors should look at the content of remuneration reports and ask questions if the data are complex or opaque’.

My view is that it is an ongoing debate as to what extent institutional shareholders should intervene in the affairs of the companies in which they invest (investee companies).  It is widely recognised that engagement and dialogue are useful and necessary for an institutional investor to monitor the activities of investee companies.  However there is a line to be drawn between what it is feasible – and desirable – for the institutional shareholders to do, and what might be seen as undesirable and restrictive.

Sophia Grene article  ‘Funds say they did all they could to warn banks’ (FT, page 9, 8th Feb 09) highlights the view of the UK’s Investment Management Association that ‘fund managers did all they could to prevent banks hurtling to their doom, but under the current system, shareholders cannot shout loud enough to be heard’  The IMA also indicated a possible way forward for the future ‘investors can only do so much…..maybe we need to take a closer look at how investors and non-executive directors interact.  They’re privy to much more information than the investors’.

Walker Review of the Corporate Governance of the Banking Industry

Sir David Walker has been appointed to lead a review of the corporate governance of the banking industry which will look into remuneration and bonuses, risk management and board composition. The terms of reference can be found at:

http://www.hm-treasury.gov.uk/press_10_09.htm

Bankers abroad

In the US, President Obama has brought in reforms to limit the remuneration of executives to $500,000 at banks which have had a bail out.  Shares could also be given under incentive plans but would only vest once government support had been repaid, ‘Obama gets tough on pay for executives’, Alan Beattie and Edward Luce (FT page 1, 5th Feb 09).
Chris Mallin