Remuneration packages spark shareholder revolts

Shareholders have finally challenged and changed company decisions after weeks of high-profile campaigning over pay deals and executive elections in the UK. Now further rebellions are threatened.

So far this spring, Aviva, Central Rand Gold and car dealer Pendragon have lost the vote on remuneration reports and a number of other companies, including Barclays Bank, Inmarsat, Premier Foods and William Hill, have seen unprecedented revolts. Companies such as AstraZeneca, Aviva and Trinity Mirror have even seen senior executives depart after shareholder pressure, mostly linked to remuneration.

At Barclays, where chief executive Bob Diamond received a £17m ($26.8m, €21m) package last month, the rebellion was sparked by a combination of underperformance and large rewards to directors.

Even though Diamond himself said returns had been “unacceptable”, Barclays treated the incident as a communications breakdown, merely clarifying its remuneration policy and explaining it had no option but to pay bonuses.

Of the pay deals rejected, Central Rand Gold suffered the heaviest defeat, with a 75% vote against. At Pendragon, more than two-thirds of voters rebelled.

Other companies have only narrowly avoided defeat in votes that are becoming much more than gestures of dissent. William Hill, for example, saw 49.9% of proxy votes against pay packages and 50.1% for.

The SRI advocacy group PIRC said a mixture of performance concerns, political pressure and public disgust was driving shareholders.

“A key lesson we believe that shareholders should draw is that voting matters,” the PIRC said. “There has been an unfortunate tendency in recent years to underplay the value of voting. Yet, at the risk of stating the obvious, the current wave of protests, and the public debate it has generated, would not have occurred without shareholders choosing to vote against. We worry about the health of our democracy when there is no effective opposition to the ruling administration.

“We should take the same view of shareholder democracy. North Korean-style votes on director elections are not a good thing and, more worryingly, can disguise the fact that there are shareholder concerns about the candidate. If investors don’t use their voting rights when they have concerns, then the signalling function of the vote is distorted.

“Perhaps it’s a forlorn hope, but maybe in future we could try to view votes against management as a healthy difference of opinion, rather than insurgency.”

PIRC also questioned whether it is time for investors to be more open about how they exercise ownership. “As we have seen these past few weeks, institutional shareholders can exert significant power within companies. Yet the power they have is essentially delegated to them by the public, whose savings and investments they manage.

“In this era of transparency, it seems out of kilter that large investors argue without challenge that they should be able to exercise their delegated power privately.”

The well-publicised votes have caused wider ripples. Even the UK’s right-wing Mail on Sunday newspaper is urging mandatory public disclosure of shareholder voting records.

Further revolts are expected during the summer voting season. A member of the government’s own business advisory group has warned that the coalition has ‘poisoned the well’ for FTSE directors by encouraging shareholders to question executive pay.

In the US, meanwhile, just 45% of Citigroup shareholders voted ‘yes’ to an executive remuneration package in an advisory vote required under the Dodd-Frank Act.

The result has surprised governance experts. Beth Young, research associate at GMI Ratings, said: “I would think that, given the amount of public and regulatory attention that Citigroup has had for the last four years, they would not be in a position to go to a meeting and have a negative investor vote.”

The investor backlash, very rare since the institution of Dodd-Frank, comes after the bank’s chief executive, Vikram Pandit, was awarded pay of $14.8m last year, a figure at pre-recession levels.