Royal Dutch Shell Plc  .com Rotating Header Image

Angry shareholders ambush the top pay bandwagon home

The Observer home

The eruption of anger at Shell’s annual meeting will also hit directors of other companies – and the institutional investors who stand accused of complacency and collusion, writes Richard Wachman

  • Richard Wachman  Richard Wachman, The Observer, Sunday 24 May 2009

In the City, a whiff of grapeshot hangs in the air after the unleashing of one of the biggest waves of shareholder anger in recent times. The target companies include big names such as Shell, BP, RBS, Xstrata, Next, Amec and Provident Financial.

All must bear the shame of knowing that their remuneration reports have been opposed by a majority or a sizeable minority of shareholders. Once again, bosses are accused of having their snouts in the trough during a period when capitalism was coming off the rails.

The onslaught comes after politicians, regulators and public opinion identified bonuses and sky-high pay packets as one of the prime causes of the slump. By linking pay with share price performance, managers were encouraged to make foolish short-term decisions that ultimately brought the edifice of capitalism crashing down. Now there is a backlash as shareholders target excessive pay and bonuses sometimes awarded even if a company does badly or misses its performance targets.

Few would disagree that executive pay has been spiralling out of control. According to remuneration specialists, the average FTSE 100 chief executive has seen his rewards jump 125% in the past 10 years, while the heads of smaller quoted firms have seen their pay increase by 80% in the same time span.

So what? That was the stock response in the City when everyone was coining it, but in a recession, things are different. Investors are out of pocket, and besides it’s best to be seen to be doing something when politicians are muttering about draconian legislation to cap pay awards once and for all.

Not that fund managers – who act on behalf of pension funds, retail investors and insurance companies – come up smelling of roses. They stand accused of complacency, even collusion, when the good times were rolling. Colin Melvin, at pension fund manager Hermes, speaks for the critics when he says: “My feeling is that the horse has bolted; action should have been taken years ago. Investors have shown that they haven’t been good long-term owners of companies.”

Many fund managers would strongly disagree, arguing that they had pulled out of the banks, for instance, well before the onset of the credit crunch in the summer of 2007. Legal & General, among others, challenged executives on pay, strategy and high debt levels, but to no avail.

But Melvin is surely right to wonder how long the backlash will last. After all, we have been here before: remember Cedric the Pig in 1995 when the GMB union held aloft pictures of a pig outside British Gas’s annual meeting to protest at the pay of chief executive Cedric Brown (although, at £475,000, Brown’s pay was modest by today’s standards).

Then there was the upswing in shareholder activism after the technology crash at the turn of the millennium when new rules were introduced to strengthen corporate governance. The protests culminated at GlaxoSmithKline, where shareholders threw out the remuneration report amid outrage that former boss Jean-Pierre Garnier was entitled to a £22m golden parachute if he left.

But when recovery took hold, and stock prices headed north, opposition to fat cat pay subsided. Peter Montagnon, head of investment affairs at the Association of British Insurers, recognises the syndrome all too well. “The investment community gets tougher during a downturn and more forgiving when things go well.” But he warns that “what has been acceptable up to now may not be acceptable in the future”.

The severity of the banking crisis has shaken public confidence, and this cannot be underestimated, he says. “Unless companies behave responsibly, there is a danger people will question the principles that underpin the whole system.”

What he fears most, though, is too much regulation, too much socialism: he concedes that the jury is out on capitalism, but says people should not lose sight of the fact that “businesses create wealth for savers”. He acknowledges, however, that “the public’s faith in capital markets has been shaken and it needs rebuilding”. One way to do it is to ensure that executive pay is “based on demonstrable integrity and that it rewards performance, not underperformance and mediocrity”.

The latest bout of shareholder activism comes as the European commission is threatening to clamp down on executive pay across the spectrum. In Britain, City minister Lord Myners says things must change and has accused investors of behaving like absentee landlords.

At an Investment Management Association dinner last week, Myners warmed to his theme that short-termist institutional investors – the fund management industry acting on behalf of its pension fund clients – were asleep at the wheel. He said: “We have almost certainly understated the profound challenges faced by the majority of institutional fund managers … they are not set up to act as owners. They are investor-leaseholders rather than freeholders.”

Myners has ordered the Financial Reporting Council, as well as a task force led by Sir David Walker, to come up with reforms that could be enshrined in new laws or become part of beefed-up codes of best practice.

Myners even took a swipe at the pension fund industry itself, saying that “short-termism, as practised by pension funds, is self-defeating for those charged with delivering pensions over many decades in the future, yet it remains a dominant form of behaviour”.

He added that a focus on shareholder value, as measured by relative share price performance over quite short time periods, “lies at the heart of a number of behaviours which have delivered less than ideal outcomes”. Among these, he lists “a failure to take account of the longer-term consequences of investment activity, including its impact on the broader economy and society”.

At Hermes, Melvin argues that pension fund trustees need to take a more proactive role in holding managements to account and institutional investors in general should work together to campaign for better corporate governance.

Despite fears that the City will go back to its bad old ways when the recession lifts, Melvin says there are grounds for optimism because pension funds are beginning to act in unison after losing colossal sums in the crash.

“By acting as a united voice, pension funds [and other long-term investors] are helping to steer companies away from dangerous waters towards the safer shores offered by more accountable, transparent and responsible business practices,” he says.

But Pirc, the shareholder activism group, reckons that it will take new City regulations to bring recalcitrant companies to heel. Its managing director, Alan MacDougall, says that if Shell, for instance, fails to put its house in order, ministers will need to “rewrite the corporate governance rulebook” and make majority shareholder votes at annual meetings binding on management.

In one of the biggest investor rebellions over directors’ pay, 59% of Shell’s shareholders voted down its remuneration report last week. They objected to the discretionary award to executive directors of bonuses for 2006-08 performance, made even though the company failed to meet its targets. The size of the Shell “no” vote has been topped only at RBS, where 80% opposed the company that had angered Britain when it allowed Fred Goodwin to leave with a pension worth £703,000 a year.

Worryingly, Shell has given no indication that the bonuses will have to be repaid. Neither has it reprimanded Sir Peter Job, head of the remuneration committee that decided to pay the bonuses in the first place.

MacDougall says that the Shell vote, as well as clashes at other companies, make this a unique moment for capital-market reforms: “The danger is that when stock prices head up, a lot of this will be forgotten. While we applaud what Lord Myners has said, we want real change. The time to strike is now.”

Pirc is proposing that voluntary codes of governance be scrapped in favour of regulation that would be enforced by the Financial Services Authority. It is calling for the compulsory annual re-election of all board directors, and wants shareholders to be allowed to vote on audit reports. Auditors would be forced to resign if their reports were rejected.

MacDougall says: “There are serious structural flaws in the model of capitalism we have grown used to in the UK and these require urgent attention. The steady inflation-busting growth in executive pay while equity markets have see-sawed destroys the myth that we either have remuneration under control or have linked it to performance.”

Pirc is by no means alone in its criticism of standards of corporate governance. This month, the Treasury select committee warned that the review on the future of regulation by FSA chairman Lord Turner was too complacent about the role of City pay in the current crisis.

And, for the first time, the committee tackled head-on the murky role of remuneration consultants whose advice on pay levels and bonus packages is regarded as being too readily accepted by the big-company non-execs who staff remuneration committees.

Perhaps it is time for the consultants to emerge from the shadows; there are only a handful that service the major UK companies. Step forward Towers Perrin, Kepler Associates, New Bridge Street, Deloitte, Watson Wyatt, Hewitt, and Mercer. As in other sectors of the City, there is a circle of star performers: among them Carol Arrowsmith of Deloitte, John Carney of Towers Perrin and Vicky Wright of Watson Wyatt.

One leading fund manager says: “These are well-known names who know a lot about remuneration schemes, but there are concerns. Generally, I would say they are a thoroughly bad influence. They are seen by fund managers as having extreme conflicts of interest: they are effectively paid by the board and are only seen to be doing their jobs if remuneration rises. In theory, remuneration consultants bring a certain level of objectivity to the task, but their existence allows companies to say they have done due diligence on pay, therefore it’s not their fault when benefits and performance do not match.”

But for evidence that things are looking up, look no further than America, where laissez-faire economics has been taken for granted until quite recently.

In a landmark move, the US Securities and Exchange Commission agreed last week to allow shareholders to nominate company directors. The SEC said it had proposed the rule because the economic crisis called into question whether boards were exercising enough oversight. Analysts were unanimous in saying that publicity about generous pay and the need for taxpayer-funded bailouts have changed the mood. The rule will allow large shareholders such as pension funds to nominate up to a quarter of a company’s board members.

Andy Hammerson at Co-operative Asset Management says the crisis has shown that taxpayers ultimately pick up the bill for risky decisions taken by insufficiently accountable companies. He adds: “But then taxpayers get hit by another double whammy: their pensions are cut as the markets fall, and their security is threatened by the prospect of large-scale job losses.”

Inflated executive pay does more than rub salt into the wounds, he adds. Rather, it is “symptomatic of a system that has been brought into disrepute and is now crying out for long-overdue reform”.

But will any new regulation go far enough? “That’s the $64,000 question,” says Hammerson.

A fund manager’s view: time to stop feeding the habit

In the 14 years since Cedric the Pig became a symbol of boardroom greed at the British Gas annual meeting, a series of reports – Cadbury, Greenbury, Hampel, culminating in the Combined Code – have sought to overhaul Britain’s corporate governance system. There have been worthwhile reforms but, as the furore around Shell’s remuneration package last week shows, there is still a big problem.

The total earnings of FTSE 100 chief executives grew by more than 11% a year in real terms between 1999 and 2006, compared with 1.4% for the median of all full-time employees. Executives and their remuneration consultants (Ratchet, Ratchet and Bingo, as Warren Buffett called them) have defended this with various arguments: one advanced now that we need to pay up in order to retain the people who can get companies out of the mire.

Shareholders have been prepared to accept arguments for pay growth while there has been evidence of strong profits growth. But the credit crunch has brought pay back on to investors’ radar. Problems surrounding appropriate pay have gained most attention in the banking sector, but are far more endemic than that. Shell and BP are two obvious cases – 59% and 40% respectively of their shareholders voted against their recent remuneration reports – but there are many others.

Take housebuilder Bellway. Was it really sensible for the remuneration committee to award bonuses equivalent to 55% of base salaries to three executives at a time when sales had halved and the company was warning of big job cuts?

Having approved many pay packages in the past and thereby fed the bonus habit and culture, shareholders clearly have to take some responsibility. But we are starting to face up to our previous inattention or failure to monitor the actions of remuneration committees.

The key issue has been the break between pay and performance. How, for example, was BT’s former chief executive Ben Verwaayen able to take home sizeable bonuses, partly on the back of growth in the company’s global services division, yet face no clawback when BT was forced to write down the value of this operation just a few years later? BT is now seeking to include a clause in the contracts of executives to allow it to reclaim cash bonuses.

Companies need to find a way to restore this connection. We want to feel that executives have “some skin in the game”, so a robust approach to setting targets, which should apply over the long term, is imperative. Perhaps, for example, any bonus over 100% of base salary should be deferred for three years.

We are looking closely at bonus payments for 2008 and the vesting of awards under incentive schemes. We are placing greater emphasis on base salaries and whether any increases have been awarded in 2009, as variable pay is usually calculated as a multiple of base salary.

There are other steps companies and investors can take to improve governance, although this may take time. One is to stop the vicious circle of short-termism in the City: fund managers are under constant pressure to produce results in the short term, which, in turn, can lead us to put pressure on companies to deliver and therefore encourages short-term thinking with regard to remuneration.

Institutional shareholders do not want to micro-manage executive pay, but company directors and remuneration committees need to wake up and start showing some sensitivity and restraint in the current environment or they risk facing the kind of ignominy and public showdown suffered by Shell.

• Anthony Nutt is head of income and UK equities teams, Jupiter Asset Management


This website and sisters,,,, and, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.