Shareholders have the board’s attention on pay

11 Jul 2014

US and UK shareholders are targeting the same theme, with similar results

A study of the results of shareholder meetings in the US and analysis of annual reports in the UK show that shareholders in two of the world’s largest financial markets are putting pressure on boards, for significant returns. And where shareholders are leading, legislators are following, with the European Commission proposing a Directive to enhance further shareholder rights.

Proxy Pulse and the UK’s annual reports show that, broadly speaking, shareholders are focusing on corporate governance issues, pressing companies to demonstrate restraint on executive pay and, through their activism, encouraging better engagement from companies.

In the US, a survey across all companies of all sizes, found that 11% failed to attain the 70% support threshold for their executive remuneration packages. Large cap companies ($10bn +) enjoyed high support (93%) for their pay proposals, but small and mid-cap companies felt the heat from shareholders, perhaps suggesting that more significant improvements in corporate governance and broader performance may be required before executives can receive the bonuses they are currently seeking.

In the UK, companies are pre-empting shareholder ire on the whole by exercising caution over executive pay. In 2013, only one in four CEOs received a pay increase, and many of those that did saw their pay go up only in line with inflation. In addition, remuneration committees aren’t releasing the whole of the bonus maximum for either CEOs or CFOs even taking into account long-term incentives for which a recovering stock market will tend to increase values. The new requirement to report a single total figure for directors has in some cases lifted the lid on compensation, opening companies up to even greater scrutiny over pay.

Classic shareholder activism is on the decline. Headline efforts such as ‘vote no’ campaigns have dropped in the US. But this does not mean that activism more broadly is down. In fact, companies have simply become better at reaching out to their shareholders and negotiating before the point of crisis. In some cases, companies are taking a more targeted approach to communicating with their shareholders, refining their approach by analysing historical voting participation and tailoring their outreach.

And UK shareholders may have further rights to look forward to. The European Commission has proposed a Directive to increase engagement, create a better link between executive pay and performance, ensure the reliability of advice from proxies and facilitate better communication of cross-border information along the investment chain. The Directive also resurrects the idea of disclosing and explaining the ratio between average pay of directors and employees in relation to the value of the company.

Both management and stakeholders are seeking a post-crisis balance between performance and reward, and the information on both of those measures. Overall, shareholders continue to question pay packages and demand more conversations with management, pressing companies on fundamental aspects of their corporate governance. And they have the board’s attention too. Companies remain cautious over pay and are steadily improving the ways that they communicate and negotiate with stakeholders.