Current Governance Challenges With Executive Remuneration
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Current Governance Challenges With Executive Remuneration

14 November 2019

How does today’s corporate governance landscape look like from where you’re sitting? For Nicholas Stretch of law firm Ashurst, common themes emerge from the overlapping momentum of UK and EU legislative changes, a new corporate governance code and investor pressure. It will come as no surprise that “executive remuneration and responding to voter dissent” are high on the list. And you can complete your bingo line if you also have “alignment and sustainability, strengthening the voice of employees and stakeholders, and a strong focus on good internal governance.”

Nicholas was part of a panel at the recent Equiniti Employee Services Forum, that also featured Bill Cohen from Deloitte, Anna Watch from BT Group plc and Adam Rose from Boudicca Proxy Consultants. Together they picked over the key features of these current governance challenges, and separated the hype from the reality.

Times have changed

It’s a governance landscape that Bill observes with the gently amused perspective that comes from experience – particularly when it comes to executive remuneration.

“When I started in this field, there was hardly any governance for remuneration, and there wasn’t really any meaningful disclosure and, actually, you didn’t get paid very much,” he says. “How times have changed. The world of media, politics and government are now completely intertwined with the ‘remuneration’ world and there’s nothing we can do about it. We just need to get on with it.”

Don’t believe the hype

But as he and Nicholas point out, the facts are a little different to the media hype. “If you look at the big picture on remuneration, the reality is that executive pay went down this year,” says Bill. “Newspaper headlines are misleading but, as a result of this continued pressure, we’re not predicting any material movement on salaries. The companies who have been the most parsimonious and/or responsible over the last five years have realised that they’ve got a bit left behind by the market. But in the current climate, any more than 2% raises eyebrows and anything more than 5% raises serious questions.”

“We call it the Persimmon effect,” says Adam. “Caps have become more popular than Peaky Blinders and open-ended award structures are gone forever.”

Adam sees the key areas of dissent in the FTSE 350 as a cocktail of salary increases, recruitment packages, over-boarding, stretch of targets and long-term employee incentives (LTIPs). “As soon as you think you've caught up with the expectations of shareholders and their advisors, they're going to move again,” he says. “However, we sense that the gap between what investors want and what boards are prepared to do is narrowing – and at a faster pace than ever.”

It’s a game of cat and mouse, suggests Anna – who’s not so sure the gap in expectations is narrowing. “Companies and boards are constantly trying to appease the shareholders and advisers – and as much as you’re moving, they’re moving off further into the distance so that gap is just moving rather than narrowing.”

Unpredictable proxy advisers

In terms of balancing these interests, Anna likens the current work of remuneration committees to “dancing on a pinhead” – particularly given the unpredictable stance of proxy advisers. She points to a recent resolution that ISS voted in favour, while Glass Lewis voted against.

“You just don’t know the reaction you’re going to get,” she says, reflecting Bill’s calls for greater consistency on the proxy side.

But Anna also stressed the importance of working hard for the best outcomes and doing everything possible to communicate with investors. “Engaging with the shareholders has really helped us.”

“In many ways, it’s been a quieter AGM season this year,” adds Bill. “But this has been achieved with an awful lot of work behind the scenes.” 

 

*This article was based on a plenary session at the 2019 Equiniti Employee Services Forum

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