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Shareholder Spring Gives UK Bosses Hay Fever!
16 Jun 2012 11:09 AM
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What do Aviva, Barclays, Easyjet, HSBC, Xstrata, Cairn and WPP have in common? All these companies have faced angry shareholders protesting against high CEO pay. Many in Britain are calling it a 'Shareholder Spring' and it's taken down some big-ticket CEOs.

Springfever has attacked more than a dozen British companies this year and no ordinary spring this but one in which shareholders have voted down the big salaries paid to top bosses at well-known companies.

32% of Barclay's investors voted against the bank's pay report especially since bonuses reportedly amounted to over 2 billion pounds whereas the dividend payout totaled 700 million pounds.

At AVIVA more than 50% shareholders refused to support the remuneration report leading to the resignation of CEO, Andrew Moss. Sly Balley at Trinity Mirror also headed out to door when her remuneration came under attack.

20% at HSBC, 40% at Xstrata and 60% at Cairn Energy voted against top management pay plans.

Earlier this week, WPP boss Martin Sorrell, the second highest paid CEO amongst FTSE 100 companies was forced to defend his 13 million pound pay package after 60% of WPP shareholders refused to support the plan.

Looks like last winters occupy protest has turned into a shareholder spring!

Karina Litvack

Director, Head of Governance & Sustainable Investment

F&C Investments

"Yes, in a sense what is happening is that some of the social disquiet that has erupted and that has manifested in the occupy movement has spilled over into the shareholder arena. The funny thing about the shareholder spring, as has been called, is that shareholders have had the tools that they have been using for nine years and yet only a very small minority of investors were using them. This year they have actually started to use them in large numbers. That is what is interesting and I do think that it reflects a generalized concern about what is happening."

MatthewLynn

Founder & CEO

Strategic Economics

"What we are seeing at the moment is we are seeing very significant shareholder votes against these kind of pay packages and the people who own these shares are mostly big institutions or they are wealthy individuals and people in the world they are the wealthy people and on the whole, the institutions they are voting against these pay packages are a part of the financial system, pretty, big, rich investment firms. So I think it is much more linked to two things- one is the fact that share of executive pay has gone up a lot, has gone up much more that there is any way of justification for over the last decade or so the stock market is going nowhere."

To make his case, Matthew points to IDS data showing that between the 2000 and 2010, CEO salaries of 350 largest listed companies rose by 108% whereas their share value appreciated only 8%. Proxy advisory firm Manifest says last year i.e. in 2011, the median increase in salaries was 10% following a 13% rise in 2010 and get this, one out of four FTSE 100 CEOs received an over 40% pay hike last year. Now compare that to the two year stock performance and it is clear why shareholders are so furious. That said, is linking remuneration to stock market performance fair or viable?

Matthew Lynn

Founder & CEO

Strategic Economics

"It is difficult in the short-term but we are not talking about the short-term, what we are talking about is the long-term. I agree the calculations are quite difficult but almost anything will be better from what we have now."

Karina Litvack

Director, Head of Governance & Sustainable Investment

F&C Investments

"It is absolutely correct that it wouldnt be reasonable to tie executive remuneration solely to share price performance because as you rightly suggest, there are number of factors that are outside the control of management that affect the performance of the share price. So for that reason, we wouldtake exception to for example executives being given outsized increases simply because for example the price of the underlying commodity that drives the share price of that company let us say oil has been galloping. So you want to look at a variety of performance indicators."

Nilufer von Bismarck

Partner, Slaughter & May

"If it is properly structured, I think it could work in a way that is acceptable both to shareholders and companies but I think the important thing will be through the year seeing how companies are going to engage with their shareholders to find the middle ground that will be acceptable on both sides. The one thing that one does have to watch is this idea that there is too much going out from the companies to executives and you have to balance that against the ability to trap the right people to run our companies in the UK."

The solution could include giving shareholders more say on pay. In India, shareholder votes on management salaries are binding but then outside shareholders are a minority in promoter run businesses. In Britain, where ownership is diversified, shareholders have only an advisory vote on remuneration. UK Business Secretary, Vince Cable is considering giving shareholders a binding vote.

Matthew Lynn

Founder & CEO

Strategic Economics

"Binding vote certainly is a good idea, the company is owned by the shareholders, they are the legal owners of the business and therefore of course there vote should be binding."

Karina Litvack

Director, Head of Governance & Sustainable Investment

F&C Investments

"It is interesting and Vince Cable has indeed pushed forward what has long been advisory vote to become binding and the reason for this is because he feels that a number of companies have ignored the verdict of shareholders. So when shareholders have increasingly offlate voted in the majority votes against the pay packages, companies have nevertheless not responded favorably. Sofor that reason, he wants to force them by making the vote binding. It is an understandable response, it is a response that I have some concerns about because what you are doing is you are taking an action that investors have finally after nine years of fair degree to be fair, investors have had this tool for nine years in the UK and the majority even have not bothered to use that. This year you are seeing a number of majority votes against the management and it is finally doing what it is supposed to do. Now the problem with turning that from an advisory vote, in other words, a serious red card in football language to live ammunition is that institutional shareholders who have finally got up their nerve to take a stand might suddenly betray and say for fear of plunging the company into turmoil maybe we won't vote against, maybe we will just have a private conversation to signal our discontent. So in actual fact we need to think carefully about the unintended consequences over binding vote. An advisory vote is a real useful way of publically expressing dissent and then the company has to demonstrate that it is listening. If it is not listening, I think an intelligent way to address this is to say if a company has lost an advisory vote, it should then be subject to a binding vote on the revised pay plan and then it must secure shareholder approval because I think if we do that companies would be very keen to avoid being forced to hold a binding vote."

In neighboring France, shareholder spring is being driven by the government and shareholder newly appointed President Francois Hollande had made CEO pay a campaign issue saying, no executive at a state company should make more than 20 times the lowest paid workers salary. Just this week, its Finance Minister proposed a 450,000 euro per annum cap on salaries at state run companies to make state companies more ethical.

Across the Atlantic, the weather has been spoiling but the storm has yet to hit. In April,55% of Citi shareholders rejected CEO, Vikram Pandits USD 15 million pay package but a David Polks study shows only 2% of 639 companies failed say-on-pay votes and 90% of the large companies won at least 70% approval from shareholders in say-on-pay votes.

Nilufer von Bismarck

Partner, Slaughter & May

"When shareholders are vote against the remuneration report, some of that is an objection to how the company is performing, it is not only in absolute terms what an individual is earning but how much perfect the company is making what has happened to share price, what the dividend yield is. So one of the things that needs to be balanced out is that the shareholders feel that the return is not going to executives but is actually being shared with the shareholders."

Matthew Lynn

Founder & CEO

Strategic Economics

"I think companies will increase their dividends, I think any real, practical step that they can do, they cannot do much about the state of the markets, which has affected as you said which now no one can control but they can control their dividend. If you had higher dividend, share prices over the medium term will start improving."

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