Say on Pay: what have the Victorians ever done for us?

In the run up to the introduction of the UK’s remuneration regulations in 2012, the headlines and much of the political commentary suggested that shareholders were in need of extra powers to control executive pay. What the Thomas Cook vote has shown clearly, however, is that – in the UK at least – there is more than one way to make a point.

Thomas Milner Gibson

The original say on pay minister: The Right Honourable
Thomas Milner Gibson, President of the Board of Trade 6 July 1859 – 26 June 1866 [more]

Contrary to assertions that shareholders are, or were, powerless, shareholders in UK plc have always had a number of powerful tools at their disposal to hold directors to account. The first binding votes on pay were in fact a Victorian invention; under The Companies Act of 1862, Table A, article 54 required that: “The future remuneration of the directors, and their remuneration for services performed previously to the first general meeting, shall be determined by the company in general meeting.” [original text] Over time, however, powers were transferred from shareholders to the directors.

A century and a half later, here’s what is in the investors’ 21st century tool box:

Binding votes on pay governance

LTIPs: The Listing Rules [s9.4] require that, except in limited circumstances, share-based remuneration must be approved by shareholders by simple majority. Votes against LTIPs, as evidenced by Manifest’s analysis of 20 years of voting results are rarely, if ever used. In the top 100 companies, since 1997, only Xstrata failed to pass their LTIP vote with 55.26% against. The vote against Thomas Cook therefore marks a notable departure from past practice.

Pay Policy: Introduced by the Enterprise and Regulatory Reform Act 2013 Ss79-82 brought the forward-looking vote on pay which is usually undertaken every three years. The 2017 AGM season will be the first three year anniversary when most policies will be refreshed.

Remuneration Committee Chair and Members: While some would propose that the remuneration committee should bear the brunt of shareholder ire on pay, this overlooks the role of the unitary board under UK law whereby all directors are equally responsible for the decisions of the board. Quite famously, Alison Carnwath, former Barclays plc remuneration committee chairman divulged after her resignation as non-executive that she had disagreed with the pay strategy for CEO Bob Diamond. To have penalised her for speaking up would have indeed been rough justice.

In addition to scrutinising the structure of pay and alignment, shareholders might wish to question the wisdom of asking new NEDs with little to no experience of the company, to be part of the remuneration committee, or as in the case of Ashtead and Mediclinic, becoming chair of the RemComm. According to Manifest’s analysis, almost 70% of appointments to the top 100 UK remuneration committee since January 1st 2016 are directors entirely new to the board, 12 of these were women who, on average, are younger than their male peers and generally less experienced. Maybe chairman are looking for diversity and fresh thinking on pay, but throwing new recruits in at the deep end is generally not a good strategy for ordinary employees, let alone directors with far-reaching legal responsibilities.

Chairman of the Board: Arguably the chairman is the individual with most influence over the business of the board and for setting the tone at the very top. A vote against the chairman is seen by some as the ultimate nuclear option, but where there have been long-standing struggles to be heard (or understood), this could well be one way forward.

Non-binding votes on pay governance

Say on Pay Vote: A non-binding , backward looking or “implementation vote” was introduced to the UK under section 439 of the Companies Act 2006. This has generally been the go-to vote for shareholders to express their displeasure. It’s effects have been watered down, however, by suggestions by boards that “a win is still a win” and that shareholders have been misled by inaccurate analysis.

Shareholder Spring – the Sequel 

AGM season seems to have become like a long-standing movie franchise: Shareholder Spring – the Sequel, part N “It’s back, only bigger than before!!” As film buffs will know, the odd-numbered releases are generally considered to be better than the even-numbered (99% confidence). A 2017 shareholder spring of catastrophic failures (which Manifest judges to be a vote in excess of a 10% dissent, twice the average dissent of all resolutions) would, we propose, not be “better”, but a complete rotten tomato which would push UK governance back to a time close to the end of the Crimean War.

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