Voting against directors’ pay is a hollow victory
Is there any point shareholders voting on companies’ remuneration reports? By the time they reject the boardroom pay the directors have already pocketed the proceeds and there is nothing to stop the company behaving as badly again next year.
The inclusion of a report on directors’ pay in annual accounts and the requirement to vote on it at annual meetings was introduced as a corporate governance measure. But the vote is non-binding, meaning shareholders can rely only on shame to make directors mend their ways – and boards that push through unacceptable pay deals can be immune to embarrassment and humiliation.
The rate of rejection is increasing, perhaps as investors grow bolder. When Glaxo’s report was turned down by shareholders in 2003 it was an exception, but last year two FTSE 100 companies’ reports were successfully opposed and three of the next 250 biggest companies suffered the same fate. Tomkins has joined Shell, Grainger and Punch Taverns in facing successful shareholder revolts. And there have been some near misses, with 28 per cent of Easyjet’s investors objecting to the airline’s pay, for instance.
The trouble with the report and vote policy is that payments have already been agreed and made. If a company is recruiting a new executive it cannot undertake a vote of shareholders before agreeing terms. There is not always even the cosy chat to test out the view of leading institutions. However, it would be possible to ask investors to vote on all new bonus plans for incumbent executives. And it would be possible to delay discretionary bonus payments until after they are approved at the annual meeting.
Sir David Walker, in his review of boardroom practice last year, suggested that if a remuneration report fails to gain approval from holders of 75 per cent of a company’s shares the chairman of the remuneration committee should face an automatic re-election procedure. Hopefully that would be at the same annual meeting rather than allow a year’s grace for a committee chairman who had failed to read his investors’ minds.
For some companies shame can work. The chairman of Shell’s remuneration company stepped down after the defeat of his report, but he stayed on the board and the directors kept their bonuses.
But if the report is to have any real use, the vote needs more teeth. The threat of losing out on a bonus totally is a good incentive to make sure the payment is reasonable in the first place.
