UK's shareholder spring risks becoming a winter of discontent

16th May 2012 by QFINANCE

The “shareholder spring”, which has seen UK institutional investors rise up against corporate greed and ‘rewards for failure’, and which is named after last year’s populist uprisings across the Middle East, has got off to a remarkable start .

Recent scalps taken include the chief executive of insurance giant Aviva, Andrew Moss, who quit after investors voted down the insurer’s pay policy at an annual general meeting on May 3. They were particularly incensed that, in Moss’s five years as Aviva CEO, the shares had plunged by 62% while insurer’s executive pay has ballooned by 90%.

Other chief executives who have been booted out following similar investor rebellions include Sly Bailey at failing newspaper publisher Trinity Mirror and David Brennan at the global drugs group AstraZeneca (which by the way was formerly run by ex-RBS chairman Sir Tom McKillop, now defending a £3bn law suit from investors who believe the bank conned them out of £12bn via highly controversial rights issue in April 2008).

The next complacent fat cat in investors’ sights was Ralph Topping, a blogger who also serves as chief executive of  William Hill. Topping came under pressure after 49.9%  of shareholders voted against the bookmaker’s remuneration report, largely out of disapproval of Topping’s £1.2m retention bonus or “golden handcuffs”. Protests have been less successful at Barclays, Xstrata, and Premier Foods.

Investor votes on executive pay, introduced 10 years ago, are currently just “advisory”, which means that a company’s board can ignore them if they choose. This recently happened at William Hill, where the chairman, Gareth Davis, was surprisingly dismissive of the protest vote. However that is changing and the UK government has signalled it commitment to introducing legislation that would add power the investors’ elbow by giving them an annual binding vote on pay.

Sacha Sadan, director of corporate governance at Legal & General Investment Management, which controls billions of pounds in investments, told the Guardian: “We want remuneration policies to align executive pay to performance.” L&G, which voted against 125 pay reports last year, is coming under increasing pressure from its clients – big pension funds, for instance – about how it votes. Sadan added:

“It’s a triangulation of austerity, of government – because the electorate are focusing on this – and we’ve had our clients asking us about it. Everyone in companies are getting zero or inflationary pay rises and it should be the same for executives who have to deal with morale in their companies as well.”

Louise Rouse, director of engagement at FairPensions, a lobbying group that seeks to mobilize the power of pension funds to transform corporate behavior, said:

“Both political and public anger can pass. It is very important that this doesn’t become a shareholders spring, that is that it isn’t restricted to one season.”

However there are plenty of commentators who believe the current round of shareholder uprisings may be a passing phenemenon. The Telegraph’s Jeremy Warner, for one, questioned whether shareholders have capacity, determination or even the inclination to tackle corporate excess.

“City fund managers are making a noise because they have the politicians breathing down their necks, threatening to force them to act through legislation if they don’t of their own volition… I’m not yet convinced that today’s “shareholder spring” amounts to the sea change some have proclaimed. So far, all we have seen is a quite limited response to a relatively small number of glaring anomalies in executive pay.”

Warner concluded that the problems of investor somnambulance and absentee landlord-ism may be entrenched. As he reminds us, some asset managers are reluctant to shout too loudly about corporate excess, for fear it might place their own egregious pay and ‘rewards for failure’ under the spotlight (themes I have explored in several earlier blog posts, including this one).  Writing in the Wall Street Journal’s Heard on the Street column, Andrew Peaple wrote:

Retail investors have been paying steadily more for the privilege of having their money professionally managed. In the UK, annual management fees charged by actively managed equity funds have risen to 1.49% of funds under management, compared with 1.36% a decade ago, according to research firm Lipper… Including items like audit fees, UK investors face a total expense ratio of around 1.7%; European investors pay around 2%, Lipper says. Fees in the US range from 1.1% to 1.4%, depending on fund size.”

Peaple said the feeble returns active asset managers – especially those specializing in ‘active’ UK equities – have delivered for their investors in recent years puts them in a vulnerable position, before concluding:

“…attacking executive pay can go only so far. If they really want to help their customers, [asset management firms] should lower their own fees. That might be difficult since the industry is also wedded to high compensation, equivalent to more than 40% of the revenues it earned primarily in management fees… Compensation rose 18% in 2011, with pay rises skewed to investment staff: Median total pay for chief investment officers climbed 38%.”

I certainly welcome the fact that fund managers are lobbing a few stones at self-serving and greedy CEOs who have run UK corporations badly, there may come a time when they suddenly remember that they’re living in glass houses.

Further reading on executive pay, remuneration committees and reining in corporate excess

This blog post was originally published on QFinance by Ian Fraser.

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