Investors get angry with companies whose executives are willing to cash in | Corporate governance
SSome of Britain’s highest paid business leaders are behaving as if the pandemic never happened. Bonuses won in 2019, and suspended last year as companies sought government backing, return in 2021. But there are signs of a hardening of shareholders’ stance on high executive compensation. Companies from Cineworld to Morrisons have faced investor wrath this year for their compensation policies.
The latest in the line of sight is JD Sports, who paid executive chairman Peter Cowgill nearly Â£ 6million in bonuses in the 12 months leading up to February 2020. Major shareholder groups are gearing up to vote against the pay deal at Thursday’s annual general meeting – the company’s refusal to reimburse Â£ 86million in government paid leave is a particular irritant.
Investors and activists are hardened after battles with AstraZeneca, online clothing retailer Boohoo and estate agents Foxtons and Savills.
Foxtons paid his managing director a bonus of Â£ 1million despite taking Â£ 7million from the government to support staff on leave. In April, 44% of its shareholders voted against the wage agreement. AstraZeneca boss Pascal Soriot saw a 40% vote against a deal that could give him nearly Â£ 18million in salary and benefits for 2021.
Under corporate governance rules, a shareholder vote on executive compensation – like the one Cowgill faces this week – is advisory. Only a vote on the overall remuneration policy, which must take place at least every three years, is binding.
Catalist Partners, an activist investor who owns a 2% stake in Foxtons, said in April: âToday’s vote must serve as a wake-up call for the board of directors. Glass Lewis, one of the world’s most influential investor advisory services, urged shareholders to vote against what he called an âinappropriate compensation policyâ at JD Sports.
Foxtons and AstraZeneca ignored shareholders; JD Sports would have to sue Cowgill’s award if he were to face a similar negative vote as well.
Luke Hildyard, director of the High Pay Center think tank, says shareholder activism is making headlines, but has hardly come to fruition in practice. âThere is a risk of exaggerating the scale of shareholder opposition to the lenient rewards of better wages. So far, only three salary awards have been rejected in 2021, and these are just advisory votes, so CEOs will still get the money. “
In the Morrisons supermarket chain, just 30% of the vote was in favor of his board salary earlier this month. CEO David Potts and his two most senior executives will receive Â£ 9million in salary and bonuses, after the compensation committee used its ‘discretion’ and adjusted its calculations to ignore Covid-19 costs of 290million of pounds sterling.
In April, more than 60% of shareholders of Informa, the world’s largest events group, voted against the salaries of CEO Stephen Carter and CFO Gareth Wright.
In May, Rio Tinto shareholders voted 61% against the miner’s compensation policy, which handed over Â£ 7.2million to disgraced former chief executive Jean-SÃ©bastien Jacques for last year, a 20% increase over his total salary for the previous year. Jacques resigned after the destruction of sacred 46,000-year-old rock shelters in Western Australia. The non-binding vote was ignored by the board.
Much of the compensation debate revolves around the composition of compensation committees, which are a mix of non-executive directors and consultants, often from large accounting firms.
Some argue that executive compensation needs to be attractive in a competitive world, and that rewards are as much about sending a signal to potential candidates as they are to rewarding current bosses. But business leaders know they have a short lifespan – about six and a half years for male bosses, a little over three years for women – and push for higher rewards as compensation.
Compensation committees should also choose which companies to use as a benchmark. If private equity firms are brought into the equation, the sky is almost the limit. One of the private equity firms that owns a share of Morrisons, for example, has a very generous compensation package. Silchester International Investors operates from offices in Mayfair, London. His partners shared a Â£ 110million payout last year, according to his latest accounts. Silchester owns 15% of Morrisons and should support the takeover of the supermarket at the right price.
Labor and the TUC want to inject some realism into pay rewards by giving workers a place on compensation committees. But investor groups insist they are having an impact, despite high-profile cases of votes being ignored. Legal & General Asset Management is one of the UK’s largest investors and owns a portion of most of the large companies. He says 447 companies asked him for advice last year on corporate governance, including compensation.
Senior Director Angeli Benham said: âWe believe UK companies have done the right thing by taking into account the wider experience of stakeholders when determining executive compensation. As the impact of the pandemic continues to affect businesses and stakeholders, we would like businesses to continue to exercise restraint. “
Benham is campaigning for companies to pay a living wage and offer minimum hours because it is in the long-term best interests of shareholders that staff are not on the bread line. This dovetails with the UN-backed Principles for Responsible Investment, which state that income inequality can ânegatively impact the portfolios of institutional investors,â as well as harm production, reduce growth and contribute to the economy. “Populism and protectionism”.
The Investment Association, which represents UK investment managers, sets executive compensation guidelines and has made it clear its opposition to bonuses when a company has laid off staff or used government bailout funds. Andrew Ninian, its director of corporate governance, said: âCompanies need to be aware of the impact of the pandemic on their businesses and stakeholders, and treat leaders as they do to their workforce at large. , maybe more than ever. “
Hildyard of the High Pay Center says that the resolve of some groups is undermined by those who do little to reduce executive pay: long-term incentives which are the most important component of executive compensation bonuses.
âThe awards are presented by current or former business leaders who have themselves received excessive top compensation. Compensation committees and high net worth investors are insufficiently skeptical of the need to lavish millions on business leaders, nor of the exaggerated importance of individual leaders or the difficulty in finding replacements.
“The process would benefit greatly from having elected workers’ representatives on boards and compensation committees – people who best understand the business and could bring some real perspective to the deliberations.”