Thursday, 3 May 2012

Despite the Headlines, Barriers remain

Jonathan Guthrie of the Financial Times called it ‘The Citi Effect’ - that days after Citigroup received a shareholder vote against its CEO’s remuneration, Barclays experienced the same veto. When companies like these have their executive remuneration reports voted against by shareholders, it is headline news and rightfully so.  It’s also an encouraging sign that shareholders are beginning to take seriously the notion that pay for performance is a good indicator of wider corporate governance practices.   Owners of companies are increasingly demanding demonstrable links between strategy, performance and pay.  And, in the cases of Barclays and Citigroup, as well as American Defense Systems, FirstMerit Corp, Intl Game Technology and KB Home in the US, they are exercising the power of no.

Two days after the Barclays vote, Citigate Dewe Rogerson, a media and investor relations consultancy, revealed the results of its investor relations survey[1] and the findings are of concern to those interested in responsible investment.   The findings indicate that an increasing number of European quoted companies say lack of engagement from shareholders is creating a barrier to good corporate governance.  55% of more than 100 companies indicated poor engagement was a concern this year, up from 41% last year.  Fewer respondents this year believed in the effectiveness of the rules and frameworks promoting corporate governance.  Lack of investors’ knowledge about the investee company was point out by one respondent as part of the problem saying, ‘In general…the interest or knowledge around our company’s corporate governance issues was shockingly low.’ Lack of communication between fund managers and governance specialists was also blamed for poor engagement on governance.

There is a further stumbling block in the journey to better governance and stewardship – institutional investors are still reluctant to disclose publicly how they vote on pay in the UK.  Despite the comply or explain requirement under the Stewardship Code, Pirc research has found slow growth in the publishing of voting data.  Out of 175 assets managers which have signed up to the code, only 27 have disclosed a full voting record.  Tom Powdrill of Pirc says that the most common reason for non-disclosure is that the information is considered confidential or to be shared only with clients.  The UK’s shadow business secretary, Chuka Umunna, supports a mandatory disclosure approach (applicable in the US for mutual funds and may be required in future for all asset managers with more than $100m under management).  A mandatory approach has received some sceptical reaction, with some warning that it would lead to a dumping of useless information.  Pirc estimates that it might take as many as 10 years before half of the Stewardship Code’s signatories make full voting disclosure, as some asset managers believe their explanations of non-compliance are sufficient. 

Because of these and other barriers to shareholder activism (such as foreign shareowners and insurance companies' unwillingness to regularly monitor external fund manager[2]), the government is considering making shareholder votes binding on future pay policy and require boards to gain a majority of between 50 to 75% of shareholder votes for a pay policy to be approved.  It is not clear whether the binding vote approach would actually be utilised.  Despite the high profile of some say on pay no votes, there is still a very long way to go toward tackling the issue of high pay.  

Since the 150th anniversary of his the publication of his book Unto this last, a number of commentators have reminded us of the wisdom of the Victorian social reformer, John Ruskin.  Much of this work has some prescient criticism of market economics. As Andrew Hill of the Financial Times highlighted a few years ago, ‘the paraphernalia being proposed to reign in bonuses and excessive pay – commissions, codes – would surely have perplexed Ruskin.  That society needs to consider such mechanisms at all, he would probably have said, is evidence ‘merchants’ have lost their moral compass and their sense of responsibility to exert ‘the widest helpful influence…by means of [their] possessions, over the lives of others.’  

[2] Ruth Sullivan, 'Insurers 'fail on stewardship,' Financial Times, 16 April 2012.

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