Shareholders need greater power to curb board directors’ pay, says IoD

Increasing shareholder power is becoming a political priority

Time for shareholders to bring big business to account (AFP/Getty)

Shareholders need more power to curb director pay if companies are to rebuild public trust. That’s the conclusion of the Institute of Directors (IoD), which has been calling upon the next government to give investors a greater say over executive pay at Britain’s biggest companies.

Right now shareholders have a binding vote on the company’s future pay policy every three years. However, the IoD believes it’s time to strengthen their hand. It has suggested that if 30 per cent or more investors oppose the plans, then companies should revisit their pay policy and give shareholders another vote.

Oliver Parry, head of corporate governance at the institute, said: “Business has been facing a crisis of public confidence since the financial crisis, and the political impetus to intervene will not disappear, whoever is elected.

“UK corporate governance is highly regarded across the world, but there is still a pressing need to rebuild public trust in big business to work in the long-term interests of investors and employees, rather than the short-term interests of managers.

“Now is the time for sensible reforms which increase transparency and draw more engagement from shareholders.”

Existing powers

However, some commentators argue that shareholders already wield a fairly hefty power if they are willing to exert it.

Vikas Shah, managing director of the commodities trading firm Swiscot Group and visiting professor of entrepreneurship with Massachusetts Institute of Technology Sloan School of Management, is one such commentator.

He says: “Shareholders have significant influence over company boards, particularly if they are either significant stakeholders, or have voting rights incommensurate with their stakes. Particularly in the larger company space, you regularly see ‘activist shareholders’ influencing board decisions and strategy simply because of the weight they carry as stakeholders in the business.

“Often larger shareholders may get a board seat for them or their vehicle, but irrespective of this, the implied control they have is exerted in many ways – sometimes for the good of the business, but often times for the good of the shareholder.”

That power is not always obvious, given recent events. In the last few weeks a number of major companies, including AstraZeneca and Barclays, have seen potential shareholder rebellions that have melted away.

However, sometimes they can have a real effect. Last year almost 60 per cent of BP’s shareholders voted against a 20 per cent hike in pay for its chief executive, Bob Dudley. This year it brought its shareholders a much more slimmed-down remuneration policy, cutting his potential earnings by several million over the next three years.

And there’s a good chance that more companies will bow more readily to shareholder pressure in the coming years. In fact, there’s a good chance that the next government might make them.

Political pressure

The Conservative manifesto includes plans to force public companies to publish pay ratios and to put board members’ pay packages to a stricter annual vote.

And Labour has pledged to reform corporate governance in its manifesto. Last year, Jeremy Corbyn suggested that a future Labour government might consider banning company shareholders from receiving dividend pay-outs if they did not pay their staff a living wage.

Some shareholders want their investments to behave responsibly even without threats to their dividends. ShareAction is a charity dedicated to supporting responsible investment, and it is urging shareholders to use their powers to steer businesses towards more sustainable and fair decisions.

Its campaigns manager, Juliet Phillips, says: “Compensation structures provide an important ground for signalling the direction a company intends to take, and the strategy that executives will be rewarded for implementing.

“This year, with numerous companies facing a binding vote on their remuneration policies, shareholders have a valuable opportunity to exercise stewardship and ensure that their vision of the future is aligned with the one executives are being paid to deliver.”

Great power, great responsibility

Of course, it’s not as simple as the more power shareholders have, the better. Professor Shah adds: “Powerful shareholders carry many and varied downsides. They can slow corporate decision-making, they may carry agendas that are incompatible with the company (even conflicting), and often times can exert their authority through quite disruptive and activist actions.”

Victor Basta, founder of the merchant bank Magister Advisors, says that shareholder power in the London market is “perverse”. “The reason is that large institutions (fund managers, hedge funds, etc) which buy large positions in public companies tend to focus laser-like on a few key areas, most notably who the chairman is, how the CEO is paid, and whether the company has hit the profits it said it would.”

He suggests that there’s little interest in company strategy, future growth drivers or how the company could reduce profits and invest in itself to grow faster.

“And shareholders can pressure for a CEO to be replaced more often because of some whiff of potential scandal than for missing targets. Bottom line: very few large investors really care about how their invested public companies are really developing.

“Companies are constantly balancing growth and profits. The last thing they need are institutional shareholders sometimes myopically focused on the CEO’s bonus package.”