There was something conspicuously absent from the Government’s Green Paper on corporate governance when it was published last November. Four months earlier, Theresa May had proclaimed she wanted to see annual binding shareholder votes on executive pay in order to end the “irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses” and to “make our economy work for everyone”.
For all May’s crusading rhetoric, this would have been only an incremental reform. Under the existing system, introduced by the Coalition in 2013, all UK-listed firms must already subject their general pay policies to a binding vote at least once every three years. Further, they have to hold an annual advisory vote on actual remuneration packages for directors.
May was, in effect, simply pledging to make those annual advisory votes on pay packages legally binding, meaning if the awards were rejected by shareholders, the directors would be compelled to come up with something else that was acceptable.
Yet, curiously, November’s Green Paper – effectively a consultation ahead of legislation – backed away from annual binding shareholder votes on pay, despite the Prime Minister’s very clear pledge only months earlier.
The policy, despite being dear to May’s heart, seemed, in effect, to have been snuffed out at birth. Why? What changed? The simple answer is lobbying. Consultants, asset managers, accountants and companies themselves had all told ministers it would be a bad idea.
This view was reflected in the report of a group called the Big Innovation Centre which described an annual binding vote as a “disproportionate response” to concerns about executive pay and one that would have “many negative unintended consequences”. These acts of self-harm supposedly including frightening off top executive talent from British firms and prompting boards to engage in “excessive consultation” with shareholders ahead of votes.
Ministers must have bought it.
But perhaps the proposal isn’t quite dead. For nothing upsets the carefully-laid plans of corporate lobbyists quite like dunderheaded behaviour of their employers.
Last week Crest Nicholson, one of the UK’s largest house-building companies, put its executive pay package for 2016 to a shareholder vote. Ahead of the vote, Institutional Shareholder Services (ISS), an advisory body for asset managers, had pointed out that Crest had moved the goalposts for the triggering of bonus awards for its top executives in the most shameless way, proposing to slash its profit growth target from 22 per cent to 8 per cent over just two years.
Crest chief executive, Stephen Stone, was set to receive a share bonus worth £812,000, on top of a salary of £541,158 while chief operating officer, Patrick Bergin, was pencilled in for £562,500, in addition to basic pay of £375,000.
“The profit target has been reduced for the second consecutive year without any compelling rationale, and the revised targets do not appear to be sufficiently stretching,” said ISS. This was effectively saying Crest was rigging its own remuneration system to ensure big pay-outs for executives.
Then something that is still pretty unusual happened: shareholders rebelled. Some 77.3m votes were cast in favour of the pay policy. But 107.3m were cast against. Roughly 58 per cent of Crest shareholders rejected the awards.
So how did the board of Crest respond to this comprehensive and humiliating rejection? Did the head of the remuneration committee, in charge of deciding pay policy, instantly fall on his sword? Did the company pledge to scrap the proposed awards without delay and redesign the whole package? Did the chairman bow his head, beg the forgiveness of shareholders and promise a period of deep and serious reflection on the company’s priorities? Far from it. Crest declared itself “disappointed” with the way the pay vote had turned out, but said that it would, nevertheless, proceed with paying the bonuses. And why not? After all, this was only an advisory vote. Nothing to get excited about.
May’s original pledge was the right one. These pay votes should be annual and legally binding. The practical objections were always weak and ought not to have influenced the Green Paper.
There is also a bigger picture here which Theresa May’s July speech rightly alluded to. Consider the damage that shrugged-off shareholder pay protests already inflict today on public confidence in UK business. Simon Walker, the former head of the Institute of Directors, said last year in the wake of two previous major shareholder rebellions that “British boards are now in the last chance saloon”. Crest has surely drained the last drop of goodwill.
The corporate governance Green Paper consultation ended on 17 February. Doubtless ministers received even more advice from corporate lobbyists reiterating why the current system is the best of all possible worlds. The events of last week give the lie to that idea.
Theresa May and her Business Secretary Greg Clark should disregard the lobbying and consider the egregious behaviour of Crest. Then they should legislate.