More consultation has kept governance storms in their teacups


Ashley Hamilton Claxton, Corporate Governanace Manager

In the midst of an election campaign in which reforms to corporate governance have been a central tenet of the business sections of their manifestos, political parties are scrutinising company behaviour ever more closely. Executive pay is a central theme, with proposals for ratios to be published or imposed, reporting to be simpler and votes to be binding. New board structures, some incorporating workers, have also been mooted, as well as a call for greater diversity on corporate boards.
 
This renewed focus comes during a critical time for firms and their shareholders. Back in March, we predicted that 2017’s round of annual meetings would be a tumultuous affair, following the high profile rejection of pay packages at BP, Shire and Smith and Nephew. This season has been exceptionally busy. Not only were shareholders asked to approve the usual annual pay reports, but hundreds of triennial votes on pay policies have been taking place. The question on investors’ lips this year was whether it would be business as usual, or if companies had read the writing on the wall and opted to show some restraint.

The answers, it seems, have been mixed. While there have been high profile defeats at Crest Nicholson and Pearson, overall investor opposition has been somewhat muted.According to data from Proxy Insight, average shareholder support for pay votes at FTSE 100 companies has actually increased this year. So far in 2017, policy votes have received average support of 94.8% support, slightly higher than the 93.8% support when they were last approved. The average non-binding annual vote to approve pay in the year has jumped 4% from 2016.

For correspondents and commentators who had hoped for a series of tempestuous showdowns, predictions of voter rebellion might seem like hot air. But the real reason for this apparent calm is that this year the storms have been kept within their respective teacups. The past 12 months have seen an unprecedented level of activity from many of Britain’s biggest businesses to consult with shareholders privately on proposed changes to pay. Investors have had greater opportunities to cast a critical eye over binding pay policies well in advance of the voting season.

Several firms made significant changes to their initial proposals as a result of this private engagement. The old adage of ‘once bitten, twice shy’ rang true for Shire and BP, who after a stinging rebuke last year, both spent a significant amount of time speaking to shareholders about changes to pay. This strategy paid off, with well over 90% of shareholders backing their pay in 2017.

Others were less successful in securing the nod of approval from shareholders, with several firms deciding to abandon their attempt to push through a new pay policy, knowing they would likely fail or suffer embarrassment. So far six pay resolutions have been withdrawn ahead of a vote this year, most notably at Aggreko, Safestore and Imperial Brands. Some proposals never even hit the ballot papers in the first place because shareholders simply said ‘no’ behind closed doors. However, not everyone has woken up and smelt the coffee just yet. There have been 35 pay votes this year where more than 15% of shareholders abstained or voted against, according to data from Manifest. In particular, companies in the UK’s mid-cap index, the FTSE 250 have had lower overall support; with Proxy Insight data showing that average support on pay is down 1% from last year.

Therefore, despite some incremental changes, those who expected a watershed year for executive pay have been disappointed. Royal London welcomes the greater engagement and discussions we have had with companies in advance of this year’s voting season. But we also think that some companies have been doing the bare minimum to squeak through this AGM season unscathed. For the most part, they have avoided doing anything overly scandalous; but more importantly, have failed to make any substantial changes to how (and how much) their executives get paid. They have managed to placate their shareholders, but with greater scrutiny likely in the future, scraping by can only get boardrooms so far. More often than not, the devils are still there, buried in the detail.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.