A year after the “Arab Spring” saw a revolutionary wave of bloody protest and conflict across the Arab world, the spirit of revolution is now widely reported to have reached the UK.
Of course, Trafalgar Square is not currently full of demonstrators; the Prime Minister is not ordering tanks onto the streets of London and (as yet) there are no plans for UN sanctions or NATO air strikes against UK targets, although if the Tube drivers threaten more industrial action this may have to be looked at again. The “revolution” engulfing UK PLC is limited to disgruntled shareholders protesting and voting against “excessive” executive remuneration packages. It has accordingly been dubbed the “Shareholder Spring”. It is not about deposing hated despots enriching themselves at the cost of the people under them. No, wait, hang on.
Anyway, whilst shareholder activism and protest voting at company general meetings does not compare to the violent demise of the Gaddafis, the Shareholder Spring is not without significant impact.
Last week Aviva boss Andrew Moss stepped down after embarrassingly losing a shareholder vote on executive pay at the company’s annual general meeting. This followed similar shareholder revolts at Barclays, Xstrata and Trinity Mirror. Most recently, William Hill’s Chief Executive narrowly hung on to his £1.2m retention bonus following 49.8% of shareholders voting against it.
Company boards, concerned about the spread of this activism, will also have noted new Government proposals to increase shareholder powers to monitor executive pay. The Queen confirmed during her speech on 9 May that the Government will introduce measures to give shareholders binding votes on future pay policy, director’s notice periods longer than one year and exit payments over one year’s salary (currently shareholder votes on these matters are only advisory).
The Government was moved to introduce these changes as it saw too much “reward for failure” amongst senior executives, who are popularly perceived to receive generous bonuses despite company failures. The current wave of activism suggests that shareholders may use these new powers not only to monitor pay which does not reflect performance, but to question pay generally when it appears excessive (it has not, for example, been reported that William Hill’s Chief Executive was not meeting his performance targets). Like many recent Government utterances, however, the proposals look better in theory than they might in reality. What is “excessive pay”? More than mine? Or yours? Or the Prime Minister’s (less than £150,000, though with some very decent perks)? Or Wayne Rooney’s? And how will PLC Boards justify £800,000 as against £900,000 for example, when both sums are beyond the imaginings of most mortal men?
This could lead to companies facing a dilemma when setting executive pay. Should they appease shareholders and cut remuneration, but potentially lose valued senior staff to better paying competitors perhaps in overseas jurisdictions without the same constraints? Or, should they maintain current trends in pay, but at the risk of isolating shareholders further, with the potential embarrassing outcome we saw at Aviva?
The Shareholder Spring may be short-lived and end as quickly as it arrived with a return to economic growth and stability in share prices. However, it would be imprudent to assume this. It may be that until recently, companies have taken the indifference of their shareholders for granted. Such inertia support can no longer be assumed and steps need to be taken to re-engage with shareholders. Companies are already required to prepare detailed reports on what they pay their directors. It is perhaps time to go beyond preparing these reports for formality’s sake, and to start using them to engage shareholders and help them understand how and why decisions on remuneration are made and how they benefit the company as a whole, not least the individual shareholder.