Saturday, 7 April 2012

The Stewardship Code and barriers to shareholder activism in executive pay

Can reforms in corporate governance reduce inequality?  It’s widely acknowledged by economists, sociologists and the public that excessive inequality is detrimental to society and is politically and economically unsustainable.  As Diane Coyle says in her book The Economics of Enough, “too great a degree of inequality not only adversely affects the well-being of society’s losers, it also corrodes the social scaffolding on which a prosperous economy must be built.   It is a question of sustainability exactly because it brings into question our ability to bequeath a healthy society to later generations.”

Recent reforms of corporate governance in the developed economies have focused on the disclosure of executive pay as a consequence of public outcry over enormous pay differentials between executives and lower wage earners, pay for failure and scholarly voices of dismay over inequality.  Voting rights over say on pay requirements in the UK, USA and elsewhere are being exercised by more informed shareholders, but is it enough?  Have they had much of an impact?  Alyce Lomax, commentator on a long-term investor website put it succinctly: “Whether here or abroad, corporate governance rules may only be as strong as the folks they’re meant to empower.  If we shareholders want managers and boards to stop squandering our money, we’ll have to actually use our newfound rights.” [1] 

Will the UK Stewardship Code be an effective means of affecting change in executive remuneration?  Will it actually foster greater shareholder involvement by institutional investors?  Professor Brian Cheffins has pointed out that changes in share ownership structure are the Code’s ‘Achilles heel.’[2]  The primary targets for the code – UK-based fund managers, pension funds and insurance companies dominated the share registers of UK quoted companies 20 years ago.  But now those registers are dominated by overseas investors, hedge funds and private individuals – who are not the code’s main targets.  The following chart comes from ONS data for 1993 and 2008 making this change in ownership distribution quite plain:

When a UK quoted company has such a fractionalised share register, it may be difficult to discern a single coherent point of view from such a disparate group of shareholders – this can pose a serious barrier to shareholder activism.  The Financial Times Lex column in 2009 said it well: ‘In a globalised financial world where ownership of listed companies is relentlessly fragmenting, the ability of long-term investors to influence corporate behaviour is being steadily eroded.’

So a few weeks ago, BIS put forward another consultation – this one aiming to enhance shareholder voting rights.  These will include a binding vote on future remuneration, increasing the level of support required on votes on future remuneration, an advisory vote on how pay policy has been implemented in the previous year and a binding vote on exit payments.  Will these have an impact on say on pay in the UK?  Manifest, the proxy voting consultancy, have looked at what would have happened had the support threshold been 75% with abstentions disregarded[3].  It estimates that since the introduction of the mandatory advisory vote (in 2002),67 FTSE 100 remuneration report votes would have failed to achieve the required support threshold, whereas based on the current majority requirement, only 3 firms have lost the vote (GSK, Royal Dutch Shell and RBS).   We await the evidence in response to the consultation and primary legislation next parliament.  Perhaps this will finally allow some headway to be made on executive pay and a more equitable distribution of the proceeds of prosperity.

[1] Alyce Lomax, ‘Is Britain better on CEO pay?’, 1 Jun 2011
[2] Brian Cheffins, ‘The Stewardship Code’s Achilles’ Heel,’ University of Cambridge Faculty of Law, May 2011.
[3] ‘How would a super-majority support requirement impact UK say-on-pay votes?’ Manifest, Jan 2012.

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