Investors have been on the remuneration warpath again in this year’s AGM season but is there more to it than pay?

June 2, 2021


The 2021 AGM season has been notable for a spate of high-profile challenges to executive remuneration policies. Proxy advisers and institutional shareholders have shown scant regard for status, size or, in some cases, performance.

Astra Zeneca received no Government furlough cash, yet made bonus awards and proposed increases to LTI vesting multiples. Shareholders registered a near 40% vote against their remuneration report. The vote against at Foxtons was of a similar magnitude. Shareholders, led by Legal & General, sent an even stronger message to car dealer, Pendragon, which made a bonus award to its CEO after making 1,800 job cuts and receiving £42m of furlough cash. Pendragon’s pay report was approved by a majority of 57.58%. A proposal to re-elect the CEO received nearly 21% of votes against.

Aston Martin Lagonda’s AGM was held on 25 May. AML also received furlough cash and made bonus awards to executive directors. Proxy adviser, ISS recommended a vote against its pay report. AML’s remuneration report received nearly 82% approval.

Other high-profile cases, of shareholders’ opposition to what they regard as excessive salary increases, bonus awards or pension contributions, include 888 Holdings, BAe Systems, Intertek and the Restaurant Group (Wagamama).

It might be argued that Boards and their Remuneration Committees could have seen this coming. The IA has openly declared it will issue red tops to companies which show no commitment to standardise pension contribution rates across the workforce and has urged pay restraint during the pandemic. Fidelity has written to FTSE 350 Boards proclaiming zero tolerance if executives in companies, which have not repaid furlough funds, receive bonus awards.

It is unlikely that companies have acted with wanton disregard of clear warnings from investors. So, why is it that in so many high-profile cases, companies and their shareholders are seriously at odds once again on executive pay – a sensitive issue at the best of times?

It does not seem that performance is the key issue in all cases. Astra Zeneca, BAe, Intertek and 888 Holdings have all delivered very respectable five-year total shareholder returns. Performance may be an issue in some cases but there must be other factors at play.

A number of companies say that they engaged (principal) shareholders about their pay proposals. How, then, can it be that the number of votes against is so high? Have companies so misunderstood their shareholders’ responses or, having found they have more than 50% support, decided to plough on regardless and ask for forgiveness later. It is unlikely that a major listed company would take that view. The risk of reputational harm is too great and distracting. A greater than 20% vote against a remuneration report requires detailed investor consultation and explanation.

But the engagement process may have been sub-optimal. There might be a number of reasons for this, including the amount of time available, the transparency of the company’s message, to whom the company addressed its message and the attention devoted to the engagement process by both company and investors.

Owing to COVID, we may be witnessing an attitudinal shift in society as a whole, and among investors in particular, the effects of which have yet to be fully appreciated by companies. Making use of the Government’s furlough scheme to help retain a talented workforce, whilst keeping costs down to sustain the business, makes commercial good sense. The same can be said about bonus awards for excellent performance and proposals to retain key executive talent in a competitive market. Astra Zeneca’s remuneration report points to improvements in all financial indicators, TSR out-performance over the past 10 years, 90% achievement against bonus targets, including ESG and the need to retain executives in the face of European competition. Performance against targets can be checked and the remuneration practices of major European pharmaceutical firms are easily verifiable.

The opposition to making bonus awards where furlough cash has not been repaid, introduces a moral/ethical element to the debate. Is it acceptable? Does it feel right? Your answers will depend on your point of view. Some investors, possibly pension funds, which, based on recent comments from the industry, seem to be more focused on financial returns than they are on the impact of business on the environment and society, will take a more commercial view than others.

Whilst the moral/ethical argument about bonus awards and repayment of furlough cash might not survive long after the closure of the furlough scheme, the die has been cast. Investors are already focusing on what is acceptable and what feels right in an ESG context, e.g. the dash towards investment in sustainable energy projects away from carbon-based energy production, a transition which, for a diverse range of reasons, is likely to take time in some parts of the world.

This makes life tougher for Boards and Remuneration Committees. Section 172 Companies Act 2006 already requires directors to have regard to the interests of employees and the impact of the business on the community and environment and to maintain high standards of business conduct, whilst promoting the interests of the company. We may have reached a point at which the meaning of high standards of business conduct is becoming more clearly defined.

All of the people cannot be pleased all of the time. So, judgement is needed to identify priorities and to tailor corporate behaviours, including remuneration policy, accordingly. A strong governance framework and clear communication of management culture, business strategy and remuneration philosophy will enable investors to make informed choices about whether to invest or stay invested. A clear and consistent message from investors about their philosophy and investment policies will enable companies to decide whether to change their behaviours and remuneration policies. Clarity and consistency from both sides is a pre-requisite of sound and informed debate. Allowing time for engagement is essential.

Please contact Paul Norris if you would like to discuss any aspect of this article.

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