Are Say-on-Pay Votes Worth It? | Chief Investment Officer

(March 4, 2013) — The United Kingdom’s National Association of Pension Funds (NAPF) has written to some of the country’s largest listed companies outlining its members’ – their shareholders – views on executive remuneration, but evidence suggests these claims are falling on deaf ears.

A letter from Joanne Segars, chief executive of the NAPF, told chairmen of FTSE350 companies that during last year’s AGM season, the organisation’s members had sought “more robust” links between executive rewards and company performance. She said at this year’s meetings, shareholders would require progress on a specific set of principles.

These included capping base pay rises at inflation and in line with the rest of the workforce; performance-related pay should be based on “genuinely stretching” scenarios and “support long-term growth of the business”.

Segars also said NAPF members would push back on the use of peer group benchmarking. “We are often told that each company is unique; as such we would like to see boards reflect more upon the drivers needed to enact their own individual strategies and less comparing themselves against their ‘peers’.”

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She warned FTSE300 chairmen that remuneration committees should be prepared to face further fights from shareholders if they failed to show authority over deciding remuneration packages.

The letter coincided with a referendum in Switzerland, where the people have overwhelmingly voted to give shareholders in public companies a greater say on larger decisions, including on executive remuneration packages.

Last week, Hermes Equity Ownership Services informed the board of The Walt Disney Company that it had lodged a shareholder proposal to try and force change to the company’s remuneration arrangements.

However, a report from Towers Watson has shown moves in Australia that should have allowed shareholders greater input on compensation agreements have effectively fallen flat.

Stephen Burke, a director in the consulting firms’ executive compensation practice said communication between shareholders and companies had improved, but little else had done so.

“It appears unlikely that say on pay will drive any major changes in the way Australian companies approach executive pay,” Burke said. “In short, there are few lessons to be learned from the way Australian companies deal with these issues, although Australia’s say-on-pay experience underscores the challenges governments confront when they try to go beyond nonbinding say-on-pay votes.”

Since 2011, Australian public companies have been subject to a binding vote on remuneration reports, based on a “two-strike” policy. Under this regime, if 25% or more of shareholders vote against a company’s remuneration report at two consecutive AGMs, the board is subject to a “spill” motion. If the spill motion receives the support of 50% or more of the company’s shareholders, then a separate general meeting must be called within 90 days at which all directors except for executive directors must stand for re-election.

Technicalities within the regulation around thresholds of votes cast at the AGM – rather than of all shares outstanding – and a general reluctance by Australian shareholders to have their say have meant a “farcical situation” has ensued, Burke said.

“Only those companies where opposition to executive remuneration exceeds 50% of all shares likely to be voted are at risk of a successful spill motion. For other companies, getting a strike undoubtedly makes news and creates a significant distraction, for management, but is unlikely to force change where companies are confident in their executive remuneration strategies,” Burke concluded.

Related content: Joanne Segars: Battle-Ready for Europe

(March 1, 2013) — Many investors began piling back on the risk at the start of the year, but recent political and economic fumbles should make them draw a breath and consider the consequences, one of JP Morgan’s top investors has warned.

Last week’s downgrade of the UK economy and the inconclusive Italian elections did no favours to investors who have been filling up their risk buckets since the start of the year, Nick Gartside, international CIO for fixed income at JP Morgan Asset Management, has said in a note to the market.

“What we’ve seen over the last week has been the wrong sort of re-risking,” said Gartside. “The UK downgrade and the Italian election results were helpful reminders that the road to economic recovery remains a protracted and painful one and that political risks in the Eurozone retain the capacity to surprise. Clearly, risk assets did not welcome these reminders, as government bonds took satisfaction.”

Moody’s downgraded the UK to AA last Friday, which saw the FTSE slump on Monday morning. Markets around Europe were more seriously hit by elections in Italy, which began on Tuesday and remain inconclusive.

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All this has played out against a backdrop of poor European manufacturing data, concerns over the “sequester” in the United States, and noises from Japan about its central bank’s moves to help support its still floundering economy.

“To investors with long memories, these moves are not unexpected but part of the risk on: risk off dynamic of the last few years,” said Gartside.

He added that central banks’ actions had helped stem the flow of crises last year, so markets could see further intervention.

“As the Italian saga unfolds further, and if markets continue to deteriorate, we could well see another iteration of the [Draghi] put. As ever, the real question is around the ‘strike price’ of the option. How bad do things really have to get? Or, is the European Central Bank reaction function now so well-known and the threat of action so well understood, that markets won’t be tempted to find out?,” he asked.

Legal and General Investment Management, one of the largest fund houses in the UK, said in an investment committee note yesterday: “Global risk assets have essentially moved sideways over the last month with Japan and the US outperforming emerging markets and the euro area. The committee generally viewed this as a period of consolidation rather than a topping process, but lacked the appetite to increase risk unless there was a correction.”