It’s AGM season and executive pay is in the cross-hairs again. It’s a soft target but there is a bigger picture

May 17, 2023

London Stock Exchange CEO, Julia Hoggett’s recent suggestion that UK CEO pay should be increased to place London as the listing venue of choice, has grabbed many headlines and attracted some strong reaction. This comes hard on the FCA’s proposal to relax the Listing Rules, to simplify the process of bringing a company to market, presumably with a similar purpose to Ms Hoggett’s suggestion.

We are in the throes of the 2023 AGM season. Executive pay always attracts attention and the present time is no exception. The press is already printing articles of shareholder and proxy adviser) unrest about unreasonable pay practices.

ISS and Glass Lewis advise voting against a retrospective decision by the Vistry Board (owner of Bovis Homes) to relax vesting conditions for LTI awards on grounds that executives missed out during COVID. Perhaps of greater interest in this case is a report of proposals by activist shareholder, Inclusive Capital that the Vistry Board adopts a new bonus plan paying out up to eight times salary, as a result of which three NEDs have resigned.

In other reports, St James’s Place has been criticised for awarding additional LTI shares in March 2020, thus creating windfall gains for executives as the share price recovered post-COVID. No salary increases or bonus payments were made to executives in 2020, owing to COVID. And a share award to the new Aston Martin CEO, which could be worth up to £15m if the company’s share price increases to £2 to £18 has attracted concerns from ISS. Aston Martin, which has argued the proposals align the CEO with shareholders, is also under pressure for lack of boardroom diversity. There are and will be other examples on a similar theme.

Each of the above-mentioned commentators has a point. A government review shows that London listings have fallen 40% since 2008. It is not surprising that the London Stock Exchange and the FCA feel the need to take steps to increase London’s attractiveness to pre-IPO companies. However, executive pay is probably not the best (and is certainly not the only) foundation from which, at this time in the economic cycle, to launch the required thinking, by all stakeholder representatives, about how to increase the number of London listings.

Clear communication between companies and their shareholders is important. We cannot comment on the amount of engagement that may have taken place in the above examples but retrospective/in-flight amendments to LTI vesting conditions and windfall gains fly directly in the face of UK corporate governance guidance.

Activist shareholders tend to set their own agendas. This author does not have details of the bonus plan proposed by Inclusive Capital or of the Vistry/Bovis business strategy but there are examples of incentives in the FTSE, some combining both short- and long-term elements, that provide for payments representing larger than normal multiples of salary.

Aston Martin floated at £19 per share. Its current share price is about £2, so £18 would get back to about par, relative to the IPO. The new CEO might argue that the share price decline did not happen on his watch and that recovering to about the IPO price would be a significant achievement. Board diversity is a major plank in the trend to encourage boards to introduce a change to their constitution and to embrace non-financial elements of performance for sustainability and long-term value.

It’s important to remember that the examples of shareholder/proxy adviser concerns about executive pay that appear in the press represent only a small minority. They might suggest a potential reversion to “old habits” but, for the most part, companies and their Boards do not find themselves in conflict with their shareholders about executive pay.

The decline in the number of London listings is, however, concerning. The proposal by the London Stock Exchange to bring together for discussions representatives from companies, including pre-IPO companies, asset managers and owners, the FRC, IA, and proxy agencies is a good one.

2023 is a big year for UK governance reform. Examples include recently announced changes to the Listing Rules and proposed changes to the QCA’s corporate governance and remuneration codes. The FRC will publish a revised UK Corporate Governance Code later this year having already published its revised ESG guidance. Regulators are focusing their attention on cyber security, diversity, succession and contingency planning and board performance.

We are expecting materiality and proportionality to be themes underpinning the type and nature of disclosures companies will be required to make. We are also expecting corporate governance principles to encourage companies to disclose the outcomes of their policies (i.e., what they have achieved) and not their aspirations. We will be watching the rest of this year with interest.

Please contact Paul Norris if there is anything about this article you would like to discuss.

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