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To arms, investors! It’s a shareholder revolt

May 10, 2009

The days of pay awards being rubber stamped are over

Brian Peart used to jump on the train 60 times a year to go to the annual shareholder meetings of Britain’s biggest companies. The 73-year-old retired builder from Durham ploughed most of his life savings into blue-chips like Lloyds TSB, HBOS, Barclays and Royal Bank of Scotland.

He had always prided himself on being an active, engaged shareholder – part of the band of silver-haired investors guaranteed to administer globe-trotting bosses a dose of reality for at least a couple of hours every year.

“I didn’t go to whinge. I wanted to be constructive and show a real interest in the businesses and the directors who were running them,” said Peart.

In the past 18 months, life has changed irreparably. The blow-up at Britain’s banks, combined with losses on other investments, has wiped out two-thirds of Peart’s savings. Disillusioned with share ownership, and with less cash to spend on travel, he now goes to only 10 annual meetings a year.

Like a growing number of institutional shareholders, Peart is furious at the way large companies are being run and the huge rewards doled out to their top executives despite poor performance.

“At annual meetings you get told so many stories – very often untrue – that I am more inclined to stay at home and read company accounts more closely and not go to as many meetings,” said Peart. “I’m really angry and frustrated.”

He is not alone. Institutional shareholders, who rarely show up at annual meetings, are making their feelings clear. Stung by the sight of directors paying themselves sky-high sums despite distinctly middling performances, they are making 2009 one of the stormiest annual-meeting seasons for years.

Already investors have registered big “no” votes against a string of pay deals at blue-chip companies, including Xstrata, BP, Pearson and Royal Bank of Scotland. In the next few weeks furious debates will rage across the stock market from giants such as Royal Dutch Shell, Next and Thomson Reuters to smaller businesses like Galiform, the joinery group that plans to pay Matthew Ingle, its chief executive, more than £1m in salary and bonuses despite plunging into the red.

“We are witnessing a real pickup in the level of dissent at annual meetings,” said Jean-Nicolas Caprasse, head of governance in Europe and the Middle East for the proxy voting agency Risk Metrics. “It used to be that shareholders would agree to vote in favour of the remuneration report even if they had doubts over an aspect of it, but now they are more willing than ever to express their dissatisfaction.”

Michael McLintock, chief executive of M&G, one of Britain’s top three investment institutions, told a conference hosted by the Association of British Insurers and the CBI that shareholders had not “covered themselves in glory” in the run-up to the recent crisis. He expects investors to be tougher and quicker to work together to build a common approach on important issues.

The only surprise appears to be that companies are unprepared for the attack.

“It does seem bizarre – the lack of sensitivity to shareholders’ feelings given how much the world has changed,” said Richard Buxton, head of UK equities at Schroders.

WILL ETHRIDGE has made steady progress since joining Pearson in 1998 following its acquisition of Simon & Schus-ter’s school and college publishing business in America. From running its higher-education and professional divisions in the US, he was promoted to boss of the entire North American education arm last year – the group’s profit engine.

Ethridge, 56, was tipped as a long-shot to succeed Dame Marjorie Scardino as group chief executive when she eventually retires. On May 1, however, he attracted the wrong sort of attention. An £810,000 bonus with a discretionary element for thrashing out a books deal with Google over the course of two years made him the unlikely target of a campaign against pay policy at Pearson. A third of the votes cast failed to support the remuneration report.

Such tough action would have been rare five years ago. In 2009, it is becoming commonplace. In the past two weeks, the property website Rightmove, Frankie and Benny’s owner The Restaurant Group and the doorstep lender Provident Financial have suffered stinging rebukes for loading up management with pay rises and bigger potential bonuses in straitened times.

“It is surprising that companies and their advisers appear slow in appreciating the changed circumstances surrounding remuneration arrangements,” said Robert Talbut, chief investment officer at Royal London Asset Management. “Institutions are far more hawkish on companies attempting to push the envelope or plead special circumstances.”

Of course, investors are acting after being criticised themselves. In recent weeks Lord Myners, the City minister, and Hector Sants, chief executive of the Financial Services Authority, have accused fund managers of not having done enough to prevent the banking collapse.

The same is true in America, where Ken Lewis, boss of Bank of America, became the highest-profile victim of the backlash last month. Shareholders voted to split his role as chairman and chief executive, weakening his grip as the bank struggles with the aftermath of its ill-timed takeover of Merrill Lynch. It was the first time shareholders had forced a company in the Standard & Poor’s 500-stock index to split the roles of chairman and chief executive, according to Risk Metrics.

Regulators and politicians are piling on the pressure. Mary Schapiro, recently appointed chairman of the Securities and Exchange Commission, has said she favours “say on pay” rules. Last month Senator Charles Schumer said he would soon introduce a bill requiring that investors be allowed to vote on executive compensation and golden parachutes. He also wants companies to split the roles of chairman and chief executive. Barack Obama introduced a similar bill in the Senate in 2007.

ONE thing is for sure. The global banking collapse has highlighted the fact that salaries and performance have decoupled across a range of industries. According to Risk Metrics, the average cash remuneration for executives at large European firms rose 74% between 2003 and 2007, equivalent to a compound annual 14.9%.

How, though, is pay going to be policed? The voting down of pay reports delivers a bloody nose and bad publicity but often nothing more for companies that have become repeat offenders.

Putting remuneration to the vote is not obligatory in Britain. In the Netherlands and Sweden, however, it has become binding. And rather than voting in retrospect, investors have a say in substantial changes in pay policy. Philips, the electronics giant, and Ericsson, the Swedish telecoms equipment maker, have already been forced into rethinks after shareholders protested.

The European Commission is taking a keen interest. Last month it rushed out guidelines on capping executives’ golden parachutes. For now, it is up to member states to decide on the pay vote.

Peter Montagnon, head of investment affairs at the Association of British Insurers, argues that some companies are already showing restraint and instigating pay freezes.

Reckitt Benckiser, the household products giant, reduced by 25% the share options and performance shares awarded to its chief executive, Bart Becht. Andrew Witty, boss of the drug-maker Glaxo Smith Kline, “rebased” his pay to reflect the fact that he works in west London, not Philadelphia, as his predecessor, Jean-Pierre Garnier, did. However, he was still awarded shares worth five times his basic salary.

The debate on pay is leading to a wider discussion on boardroom behaviour. The Financial Reporting Council has put out a consultation document to examine the Combined Code, drawn up to guide companies on boardroom best practice.

Some argue that reform should target the make-up of the boards themselves, including directors who are meant to police the performance of executives. The Corporate Library, an independent US research firm, identified the problem of “overboarding” in a recent analysis. It raised fears that directors who sit on too many boards contribute to poor corporate governance.

Peter Butler at Governance for Owners agrees. “Nomination committees and headhunters are too narrow in the specifications they give when they recruit,” he said. “They are comfortable in having someone who is a chief executive elsewhere on their board, but if that person has filled every hour of every day in normal times, what can they do for you in crisis times?”

Robert Jenkins, chairman of the Investment Management Association, wants investors to “put a body on the street when engagement fails”. “Voting directors down is likely to do more for governance than all the code revisions in the realm,” he said. “Boards don’t own the companies in which we invest. Our clients own the companies in which we invest. It is not the board’s money. It is our clients’ money. I would encourage active managers who hold the shares to engage. And I would encourage all shareholders who engage to vote down directors of companies they judge to be to be poorly run. Hold them accountable. Who else will?”

With his armchair view of the world, Brian Peart is delighted that at last the institutions are biting back. “Without doubt it is a good thing,” he said. “They should have been doing their jobs, voicing their opinions and trying to guide companies long before. Unfortunately too often they would guide them down the wrong road or didn’t say anything at all because they didn’t want to ruffle any feathers.” Additional reporting by Dominic Rushe in New York 

Annual meetings that face rebellions over excessive boardroom pay

Thomson Reuters 
Date: May 13 
Location: Thomson Reuters building at Canary Wharf 
Key figure: Niall FitzGerald, chairman of the corporate-governance committee 
Issue: Hefty stock awards. Tom Glocer, chief executive, was awarded options worth $26m (£17m) as part of a $61m boardroom incentive package at the newly merged group. Even Stephen Dando, HR director, gets an extra £300,000 simply for staying with the company until October. There is no chance of the remuneration report being voted down, though, as the Thomson family’s investment vehicle, Woodbridge, owns 55% of the group.

Date: May 14 
Location: Queen Elizabeth II Conference Centre at Westminster 
Key figure: Sir James Crosby, senior independent director 
Issue: Michael Grade, ITV’s executive chairman, has averted a full-scale rebellion by agreeing to stand back from a full-time role by the end of the year, but the knives will still be out after the board awarded themselves bonuses worth 29% of their salaries at the end of a dreadful year. Crosby is the main conduit for shareholders to air their grievances and will be remembered by many small investors in the room as the chief executive who sent HBOS on the path to destruction.

Date: May 19 
Location: Circustheater, The Hague, with a video link to the Barbican Centre in London 
Key figure: Sir Peter Job, chairman of the remuneration committee 
Issue: The oil giant Shell is a repeat offender. Measured against the investor returns of four rivals, Shell is ranked fourth, which means that its incentive scheme should have paid out nothing. However, the remuneration committee, which is led by Job, ripped up the rules to hand out shares worth half executives’ salaries. The committee was also in hot water only a year ago for awarding bonuses to directors who had stayed on.

Date: May 19 
Location: Belmont Hotel in Leicester 
Key figure: Simon Wolfson, chief executive 
Issue: Clothing retailer Next rewrote its bonus scheme halfway through the year, which allowed directors to pocket an extra £350,000, whereas, before that, they would not have got anything. The changes infuriated the Association of British Insurers, which put out a “red top” note on the company, highlighting that it thinks it has broken the rules. Wolfson insists that leading shareholders were consulted on the scheme last summer and had no objections.

Date: June 5 
Location: Scottish Exhibition & Conference Centre in Glasgow 
Key figure: Sir Victor Blank, chairman 
Issue: Lloyds painted itself as the saviour of British banking when it acquired HBOS last year but mounting writedowns from its toxic loan book have turned the deal sour. Investors are looking for a scapegoat, probably Blank. They are also concerned that, after bankers were warned to rein in big bonuses, chief executive Eric Daniels can still make up to £2.2m in an annual cash bonus and £2.1m in share awards. Some bonuses can, however, be clawed back.

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