Who will boss the bosses?



Like London buses, shareholder revolts take a long time to arrive, but when they do, several turn up at more or less the same time, carrying the risk of collateral damage.

So it is with the long-simmering issue of executive pay, now to be the subject of legislation imposing a binding shareholder vote on listed companies’ remuneration policies at least every three years.

Shareholders have, on the face of it, sat back for many years while executive management have enriched themselves at their expense; or have they? Have we really got to grips with the fragmentation of share ownership - the split of economic and voting interests between savers, fund managers and voting services - that makes it difficult for companies to identify, let alone engage with, their ’true’ shareholders?

In any event, shareholders’ new-found enthusiasm for voting down high-profile remuneration reports has helped to draw some of the sting out of the original and potentially impractical ideas floated by the Department for Business, Innovation and Skills (BIS).

The problem of having to unravel commitments to directors in the event of a subsequent ’no’ vote on pay will be mitigated by having a three-yearly, more forward-looking vote instead of an annual one.

Companies will have to adapt to a longer-term cycle. They will still be able to make policy changes in that period, but any material change will have to be put to shareholders. What counts as ’material’ may be arguable.

Even so, the annual advisory vote on the directors’ remuneration report remains. Companies will still have to engage with shareholders in advance of the vote to avoid unwelcome dissent. This is now even more important because a company that loses the advisory vote must seek a binding vote the following year.

It is welcome news that BIS has listened to concerns that a 75 per cent vote would give minority shareholders too much power to block an executive pay policy that is acceptable to a substantial majority. Only a simple majority will now be required.

It is good too that the requirement for separate approval of a director’s termination package in excess of one year’s base salary has been dropped. However, companies must still ensure that amounts payable to a director on termination are allowed for under the pay policy approved by shareholders.

The rather pointless single figure for each director’s pay has survived. This must show total pay, including bonuses and long-term incentive awards. For this figure to be useful, and for any valid comparison to be made, there will have to be a common (and sensible) method of calculating the figure. Putting a value on unvested share awards will be but one difficulty.

It was interesting to see a statement from BIS that the three-year vote will “encourage companies to devise long-term policies and put a brake on annual pay ratcheting”.

In part, the pay ratchet is down to there being too much information - a point that politicians, short-term thinkers themselves, may find counterintuitive and probably impossible to reverse.

It is too early to say whether these proposals will help. By the time we can, a lot more water will have flowed under the bridge.