Boardroom pay: investors must keep revolting

This week the annual report of Melrose, a publicly quoted group specialising in turning round ailing firms, will be subject to particularly intensive scrutiny.

It is the latest company in the firing line over claims of excessive boardroom pay. Its lucrative long-term bonus scheme has paid out £167 million to four senior directors. Its executive directors – Simon Peckham, Chris Miller, David Roper and Geoff Martin – each received £42m when a multi-year incentive scheme crystallised.

At the company’s annual meeting last year, there was a major revolt over executive pay with a 22 per cent vote against the scheme – though the vote was non-binding.

Oh, dear. How often have we read about shareholder revolts like this, hoping that boardroom behaviour might change, only for details of another eye-watering boardroom pay-out to erupt?

Few issues invoke more anger and frustration among private and institutional investors alike than the never-ending examples of corporate greed and boardroom excess.

We thought that the rebellion over

housebuilder Persimmon’s £100m payout for its chief executive Jeff Fairburn, pictured right, might surely have been the final straw, the universal criticism evidence that boardrooms could not continue with excessive pay awards.

In recent weeks, companies such as HSBC and Centrica have moved to reduce chief executive pension perks to allay shareholder anger. Others, such as Barclays, Standard Chartered and Royal Bank of Scotland are being urged to take similar action.

Last week a report from Parliament’s business select committee claimed that soaring chief executive pay packages at FTSE100 firms were a symbol of “corporate greed” and were tarnishing Britain’s reputation.

Heard it all before? Of course we have. Protests reached a crescendo last year when almost a fifth of Britain’s biggest companies were “named and shamed” on Prime Minister Theresa May’s public register list of firms whose pay policies had suffered a shareholder revolt of more than 20 per cent. The number of bosses whose names appeared on the blacklist jumped from nine in 2017 to 18 in 2018.

Nor was this the first shot across the bows. There was the much-hailed “shareholder spring” of 2012. Yet investor revolts have more than doubled since then. Nor could 2012 be regarded in any way as the start of the problem. I remember covering investor revolts against huge increases in pay enjoyed by bosses of recently privatised utilities as far back as the early 1990s, and a slew of hand-wringing reports led by then M&S chief Lord Greenbury.

The sad reality now is that despite all the well-intentioned Commons committees, the shareholder rebellions and exposure in the media, many boards have failed to rein in pay. The result is that the average pay of a FTSE100 chief executive hit £5.6 million last year, with two-thirds of chief executives collecting 100 times more than the average worker.

What to do? The Commons committee has called for a stronger correlation between executive and employee pay, citing “huge differentials” in the system. The Financial Times reported that it criticised “weak” remuneration committees, arguing they wave through “overgenerous”, incentive-based executive pay awards. To address the failure, it recommended they should set, publish and explain an absolute cap on total remuneration for executives in any year and allow workers to sit on committees and include staff in profit-sharing schemes.

But how practical would an absolute cap prove? And how many companies would agree to have workers sitting on remuneration committees? It is unlikely that firms would voluntarily adopt such a change, and there are formidable practical objections to some form of arbitrary legislative cap on pay: this is, after all, a question of context, intuition and judgment. Public anger in the absence of constraint will continue to grow and calls for statutory controls would not be confined to any one political party.

The best course in the meantime would be for investors private and professional to step up the pressure on errant boards by way of shareholder votes and rebellions against excessive pay awards at annual meetings. Many fund management groups are already much more active than in the past to flex their muscles and use their voting power to force restraint.

Persimmon suffered a huge reputational blow and Jeff Fairburn was ousted from his job. Other boards have been forced to modify their awards. Where problems persist, revolts need to be more frequent and emphatic. In short, the more revolting the shareholders, the more that company executives and their advisers will be forced to listen.