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Shell has muted opposition to executive pay

Royal Dutch Shell experienced a relatively modest level of investor opposition to its executive remuneration report at its recent AGM with a 14% vote against, this follows the rival oil company BP’s loss of its pay vote last month. However, Manifest data shows it is the highest level of opposition Shell has received in the past six years – although it hovered between 10% and 11% between 2012 and 2014. Taking account of the votes positively withheld, the overall dissent was 18.06%. Mean average dissent on remuneration reports for the past 6 years has been 9% in the FTSE350 according to Manifest VoteWatch. So far this season (as @ 25 May 16) 47 resolutions in the top 100 companies have garnered higher than 15% dissent.

Manifest had graded Shell’s remuneration a D (on a scale of A-F) stating that total pay could be considered excessive given the company’s size and its recent performance which has been affected by the recent drop in the oil price. The chief executive, Ben van Beurden, has been given a salary rise of 2% in 2016 to €1.46m (£1.11m) while the aggregate of all long-term incentive awards made to him represented 692.42% of salary and the total maximum potential incentive pay for van Beurden in 2015 exceeded 1050% of salary.

Shell completed its acquisition of BG Group in February and while this could boost the business the institutional investor, Standard Life, repeated its concerns prior to the AGM, which were first made at last year’s meeting, about the appointment of Ernst & Young (EY) as Shell’s auditor. As Manifest noted in its analysis EY, which replaced PwC as Shell’s auditor for the 2016 financial year, served as auditor for BG Group since 2013. Meanwhile EY’s lead partner, Allister Wilson, was the lead partner for BG Group immediately prior to the takeover.  Standard Life believe the appointment, which followed a tender process, represented a conflict of interest for the audit firm . Standard Life voted against the appointment of the auditor at the AGM – in total there was a 7.5% vote against.

In a statement Standard Life noted that the UK’s ethical auditing standards require that ‘Auditors shall conduct the audit of the financial statements of an entity with integrity, objectivity and independence.’ and goes on to describe independence as ‘…freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity either is impaired or could be impaired.’

Standard Life said, “Since the AGM last year Standard Life Investments has engaged with Shell, BG, EY and the Financial Reporting Council (FRC) on the matter of the appointment of EY. During this engagement it became clear that the audit partner for BG Group was to become the new lead audit partner for the Shell audit.

“Standard Life Investments is a substantial investor in Shell and BG, and it is our view that the objectivity of Shell’s proposed auditor could indeed be impaired by their prior connection with BG.”

In a comment to Manifest last month, Mike Everett, governance & stewardship director at Standard Life stated,  “BG Group’s accounts for 2015 – and early 2016 – still have to be audited by EY and we perceive that their independence, objectivity and scepticism could be compromised. For example, if a material error in BG’s 2014 and 2015 accounts comes to light would shareholders be able to rely on EY to take an objective view on figures they audited?”

The FRC has recently published its reviews for 2015-2016 on the audit quality of the six biggest firms operating in the UK BDO, Deloitte, EY, Grant Thornton, KPMG and PwC. Later in 2016 the FRC intends to issue, in view of its forthcoming role as the UK’s competent authority for audit, its first report monitoring and assessing developments in UK audit quality encompassing developments in standards and policy, professional oversight, audit quality review and enforcement.

Last year’s AGM had seen the backing by management and investors of a shareholder resolution requiring the company to disclose more information in five areas relevant to climate risk. Responsible investment pressure group, Shareholder Action, produced a report prior to this year’s meeting, analysing the company’s recent climate risk reporting, which found that whilst progress has been made, Shell’s current business model is still far from aligning with what is required to achieve the goal of limiting temperature rises to ‘well below’ 2°C, with an ambition for 1.5°C, set at the UN’s climate change summit in Paris last year.

ShareAction said that in its reporting Shell provided investors with narrative reporting on what a rise of less than 2°C outcome might look like, but explicitly states that it has “no immediate plans to move to a net-zero emissions portfolio over [its] investment horizon of 10-20 years”. The report also noted that key performance indicators and executive incentives continue to encourage the replenishing of fossil fuel reserves, with climate receiving negligible consideration and weighting and although Shell has created a division to invest in low-carbon power, it does not provide details of a more comprehensive re-alignment of research and development to address the global targets on climate change.

A more radical shareholder resolution proposed this year requesting the Shell board to invest the profits from fossil fuels into renewable energy was rejected by investors receiving a 2.8% vote in favour.

What do you think?