BP, Smith & Newphew AGM season blow out

The 2016 AGM season started with major defeats for two FTSE100 companies. Last Thursday (14th April) oil giant BP and medical equipments supplier, Smith & Nephew saw their remuneration reports rejected by shareholders at their AGMs. At the BP AGM there was a 59% vote against the remuneration report and at Smith & Nephew 53% of shareholder votes cast were opposed to the remuneration report.

Reacting to the large scale opposition at BP, which was mainly focused on the high pay for the chief executive (CEO) Bob Dudley, the chairman Carl-Henric Svanberg said, “We were disappointed that the advisory vote for this year’s remuneration report was not carried. We have already spoken to a number of shareholders and have a continuing dialogue. They are seeking changes to our remuneration policy for the future. We will continue that engagement and will bring a revised policy to our next AGM in 2017.”

Simon Walker, Director General of the Institute of Directors, said, “How the board of BP reacts to this rebellion will determine the future of corporate governance in the UK. The shareholders have spoken, and BP cannot shrug of this significant expression of disapproval with the CEO’s pay package. British boards are now in the last chance saloon, if the will of shareholders in cases like this is ignored, it will only be a matter of time before the government introduces tougher regulations on executive pay.”

The think tank,  the High Pay Centre stated, “The 59% vote against BP’s remuneration report is a remarkable and welcome development. The shareholders have said: you have gone too far, and this level of pay cannot be justified or accepted. The board must think again.”

BP had been given a remuneration grade E by Manifest analysts on the grounds that the payouts under the annual bonus scheme did not reflect the the current company performance. BP has struggled since the major fire and oil spill at one of its platforms in the Gulf of Mexico in 2010 and more recently in the wake of falling oil prices.  BP did not provide the targets under the long term incentive scheme because the company said they were “currently commercially sensitive”. However, Manifest said this is not helpful to analysts trying to assess if they are sufficiently stretching or not. According to Manifest’s estimates the maximum potential payout under the variable pay schemes amounts to 775% of executives’ salary.

2016 is not the first time BP has suffered high level of dissent. In 2015 the advisory vote in favour of its remuneration report reached 86.35% and in 2014 it had dropped to 67.94%. Sharesoc, which represents individual investors, had advised its members to vote against the remuneration report. Sharesoc said, “We consider the pay of the CEO  to be simply too high, and particularly so in a year when the company suffered a record loss of $6.4 billion in 2015. Even so his pay went up by 20%. Part of the reason for the high pay was the excessively complex remuneration scheme.”

Sharesoc has also advised its members to vote against the remuneration report at the AGM of the mining group, Anglo-American, at its AGM being held next week.

Manifest had given Smith & Nephew a remuneration grade D. In its annual report the company had said that it had held meetings with investors and was looking to make some changes ahead of the remuneration policy vote – which is binding -at its 2017 AGM. This followed concerns raised about its annual incentive plan and performance share awards scheme. Smith & Nephew has not revealed some of the targets associated with the long term incentive plans because it too says they are commercially sensitive.  As with BP there were question marks about the level of pay and awards being made when compared with the recent performance of the company.

Following the AGM the company reiterated that the remuneration committee would be seeking to review its pay arrangements before 2017 and “over the summer, they will consult with a broad range of shareholders to solicit their views on how best to align executive reward with shareholder interests.”

Mining company Rio Tinto also held its AGM last Thursday but due to its dual listed companies structure the results of its remuneration report vote will not be announced until after the AGM of Rio Tinto Ltd in Australia on 5th May. Rio Tinto had been given a remuneration grade E  by Manifest. Manifest had noted that despite losses incurred in 2015 there had been a high bonus payout to the chief executive Walsh. Last year Walsh – whose total remuneration amounted to £4.3m – received 61.3% of his salary in benefits last year. Manifest’s analysis also found there was a high bonus cap and high upper limit for the LTIP which it found created unequal internal pay between Walsh and other employees. Although Rio Tinto has generally had over 90% support for its remuneration report its 2011 vote fell to only 72.3% support.

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BP 2016 Governance & Meeting Report

Smith & Nephew 2016 Governance & Meeting Report

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