2017: The next ‘shareholder spring’?

The public debate over executive pay at BP could be just the start of another ‘shareholder spring’, according to engagement experts.

Listed companies are seeking investors’ feedback more than ever in a bid to avoid unfavourable headlines regarding executive pay, several investors told IPE.

While headlines have trumpeted uprisings among disgruntled shareholders for each of the past five years, co-ordinated activities led by groups such as ShareAction in Europe and International Shareholder Services in the US indicate that 2017 could lead to significant results.

At BP, CEO Bob Dudley has agreed to a pay cut this year following criticism of previous remuneration.

Norges Bank Investment Management, which manages the Norwegian sovereign wealth fund, Europe’s largest institutional investor, has also waded into the debate. It called for CEOs to be paid in shares that were locked-in for 10 years.

“Companies are clearly looking for investors to engage on pay,” said Michael Herskovich, head of corporate governance at BNP Paribas Investment Partners. “Issuers are coming to us outside of voting season to hear what investors think.”

In 2012, significant proportions of investors voted against pay packages at Aviva, Barclays, UBS, and Citigroup. At the time, such opposition was almost unprecedented.

Iain Richards, head of responsible investment at Columbia Threadneedle, said it was “very, very likely” that the UK would see another shareholder spring this year as investors react against executive pay packages – and the people responsible for them.

“If you have an issue with executive pay, shouldn’t you have an issue with the remuneration committee chair?” Richards said. “One of the characteristics I expect to see is a focus on the chairs of remuneration committees – taking responsibility for culture and approach, and being held to account for it.”

Columbia Threadneedle voted against 23% of the remuneration proposals it saw last year, Richards said – and he expected a “marked uptick in voting action” in 2017.

Hans-Christoph Hirt, co-head of Hermes Equity Ownership Services (Hermes EOS), added that this year was “probably as active as I’ve seen it”.

“There’s a lot going on and a strong direction of travel,” Hirt said. However, he added that activity was unlikely to just focus around company AGMs as boards attempted to address shareholder concerns “behind the scenes”.

Not just the shareholders

Other factors have also driven the uptick in engagement activity. Many companies in the UK face a binding vote on remuneration policy for the first time this year, after a rule requiring one every three years was introduced late in 2013.

In addition, the Business, Energy, and Industrial Strategy (BEIS) committee – a group of politicians from the UK’s lower house of parliament – earlier this month published a green paper on corporate governance. In it, they called for a new approach to executive pay and for new rules to be implemented by the Financial Reporting Council (FRC).

The BEIS committee said: “It is hardly consistent with [prime minister Theresa May’s] vision of an economy that works for everyone to see levels of pay for those at the top increasing at a rate that vastly exceeds increases for ordinary employees and which seemingly is at odds with the value created in the company.”

The committee also called for boards to face a binding vote on pay within 12 months if more than 25% of shareholders voted against an initial proposal – an idea Columbia Threadneedle has supported.

“If 25% of shareholders dissent on the remuneration report, you should then require it to be put to a binding vote next year,” Richards said. “They would then have 12 months to get their act together before a very public vote.”

Linking pay and strategy

Catherine Howarth, chief executive of ShareAction, said there was a “huge disconnect” between corporate profits and corporate pay.

“In the last 20 years, particularly in the FTSE 100, pay has leapt ahead of shareholder returns,” she said.

ShareAction’s activities this year will focus on the link between remuneration and corporate strategy, Howarth added. Major UK listed companies such as Shell and BP face “significant challenges” regarding climate change and carbon emissions in the next 10-20 years and “really need to prioritise their business strategies”, she said.

The BEIS committee’s paper recommended that bonuses be aligned with “broader corporate responsibilities and company objectives”, and tasked the FRC with incorporating it into their forthcoming corporate governance work.

“We’re saying shareholders should be engaging with boards of directors to see how they’re going to be successful investment in a low carbon world,” Howarth said.

“The remuneration policy should be encouraging directors to focus on that. At the moment pay is linked to selling more oil and gas. We think that’s out of line with long-term strategy and requirements. We don’t think they are presenting to shareholders a plan that is long-term resilient.”

The Pensions and Lifetime Savings Association last year set out tough new guidelines for voting on executive pay, while the Social Democrats party in Germany has made executive pay an important part of its election manifesto. The European Union is also considering introducing binding vote rules for remuneration at European listed companies.

“The shareholder spring showed that investors overall are ready and do not hesitate to say ‘no’ or to put forward shareholder proposals,” said BNP Paribas’ Herskovich. “I would expect more and more markets to get binding votes on pay.”