Drug company finds the right remedy for fat-cat headlines

The Times: Drug company finds the right remedy for fat-cat headlines

 

By David Yelland

May 21, 2004   

 

“THE likelihood is I will never see that £18 million,” was the message from J. P. Garnier, GlaxoSmithKline’s embattled chief executive, at this week’s annual meeting as he successfully defended his remuneration package against the thronging hordes.

It was the correct message, underlining that Garnier’s pay depends on his ability to deliver success for the company.  

 

Last year, in an unprecedented instance of shareholder revolt, Garnier’s pay award was voted down at the annual meeting. But this year his £2.8 million base salary and his incentive package won the support of more than 80 per cent of shareholders who voted.

 

What was different this year was that there was a willingness to communicate openly; a sense of defiant determination from both Garnier and Sir Christopher Hogg, the chairman; and a broad base of support from City commentators.

 

Companies likely to attract bad headlines need to prepare the ground in advance. They need to develop a strategy before problems arise and not afterwards. By the time reporters start calling it is already too late.

 

GSK pays Garnier what it needs to in order to secure his services. It is a listed company, not a benevolent fund. But anybody who imagines that an individual being offered nearly £20 million is not going to attract attention (particuarly in the UK) is living in cloudcuckoo-land.

 

Having lost the vote last year, GSK and its advisers prepared for this. We knew the likely size of the package well in advance of its official proposal. Glaxo also removed the £22 million golden parachute from Garnier’s deal, which was an excellent example of a company changing strategy to avert bad publicity.

 

Sir Christopher, who I have always thought one of the best communicators in the business, also turned the argument on its head at the annual meeting by saying GSK would “pay for performance, not the lack of it”.

 

The result of engaging two of the main groups that lobby against fat-cat remuneration was that they lowered their swords. Neither the National Association of Pension Funds nor the Association of British Insurers (ABI) encouraged a “no” vote.

 

The ABI’s explanation for its position was, it said, that GSK had “listened” and that the result, though “not perfect”, was a vast improvement.

 

GSK’s victory this week, however, doesn’t change the bigger picture — which is the challenge that FTSE 100 companies face annually in defending the kind of packages they have to offer to attract the world’s best.

 

It is perhaps the question that chief executives ask me most often: given that their salaries and benefits are disclosed in the annual report, how can they avert bad publicity and the consequent damaging of their brands? I think this is the wrong way to look at the problem. The real issue is whether a company is certain that it can justify the package, both internally and externally. In GSK’s case, the answer to both questions was clearly yes. They were able to communicate with confidence because they had prepared the ground and discussed how to handle aggressive lobbying groups, internal disquiet and the press.

 

Moreover, GSK had resolved that even if it took some flak and suffered a bad press it was prepared to stand its ground. This is the only policy when it comes to these sticky issues — because a short-term bad press does not matter much if the longer-term strategy is right.

 

In the Garnier case, what we see is a French-born chief executive running a London-listed global company that does the bulk of its business elsewhere in the world. Yet he has learnt that his pay package can hit his brands in the UK because of the British press’s unique aggression when it comes to executive pay.

 

The companies that suffer real disasters are those whose remuneration policies have not been thought through — often companies where an arrogant management doesn’t realise the power of the press.

 

Shell is an example, as are many of the former nationalised utilities. Many of their chief executives are simply overpaid, but others are paid fairly but fail to communicate this well.

 

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