There’s little logic to 2016’s shareholder revolts against executive pay
The crisis at BHS has focused as much on the ethics of Phillip Green’s behaviour as it has on the plight of the company itself. Sir John Collins, who put his name forward for a knighthood, has said Green should be stripped of it if his handling of the beleaguered company is found to have lacked integrity.
Green is by no means the only prominent businessman to have faced criticism in recent weeks. Last month, almost 60 per cent of BP shareholders voted at the AGM against the £14m pay package for the chief executive in a year in which the company reported record losses, cut thousands of jobs and froze its employees’ pay. Hours later, over 50 per cent of Smith and Nephew’s shareholders rejected the remuneration committee’s decision on executive bonuses, despite the fact that its shareholder returns were below the median of its peer group.
It is a natural human tendency to look for specific reasons why these headline grabbing events take place. So we feel that perhaps these attacks were justified because of the varying degrees of poor company performance in each of the examples. But Sir Martin Sorrell, who has built up a global media business from scratch and really has created shareholder value, is expected to face similar criticisms at the WPP AGM in the summer.
At the opposite extreme, the business world is replete with examples of huge rewards being handed out for poor performance with no comeback at all. One of the harbingers of the financial crisis in the autumn of 2008 was the collapse of Bear Stearns investment bank in March of that year, and the virtual destruction of its shareholder value. Yet James Cayne, the chairman and chief executive, walked away unscathed with the $40 million he had been paid in cash. Fred Goodwin at RBS did have his knighthood annulled, but he was one of the very few financiers to suffer despite the ravages which they caused.
It did seem that revolts against massive pay-outs would take off in the ‘shareholder spring’ of 2012. The august Institute of Directors pronounced that companies must respond to shareholders’ anger or risk discrediting the wider business community. In the end, the protests just fizzled out.
In terms of shareholder discontent with executive remuneration, we have examples where poor performance stirs this up, examples where even exceptionally poor performance does not, examples where even good performance provokes the shareholders, and examples where a protest movement simply fades away after lots of initial sound and fury.
So it is challenging, to say the least, to construct a logical explanation of what causes shareholders to get stirred up. We should think of it instead as being more like a fashion item. Once something starts to become popular, it is likely to become even more popular, simply because it is popular. We may just have reached a tipping point, where the large institutional shareholders now feel it is the done thing to pillory top executives, almost regardless of their performance.
As published in City AM on Wednesday 4th May 2016
Image: Sir Martin Sorrell by Chip Cutter is licensed under CC BY 2.0