Please note that I am on vacation for the next three weeks. During this period, I will only be posting when my schedule allows. I will resume regular Monday postings upon my return in mid-April. I hope to see you all back then! New posts will be publicized on Twitter and LinkedIn.
General Electric and Bank of America have both recently announced amendments to their by-laws that will allow a shareholder or group of shareholders holding 3% or more of a company’s shares for at least three years to nominate up to 20% of the board’s directors and include those nominees in the company’s proxy statement. This move should be welcomed by shareholders who will have the power to nominate allies for election to the board. By giving shareholders a say on who is nominated for election, shareholders have the ability to influence important issues of governance and corporate management that previously were out of reach.
Hopefully, shareholder nominees that are actually elected to the board will be appointed to board committees, including remuneration committees. Whether this will lead to any significant changes in remuneration policies and practices remains to be seen. However, shareholders now have the power to nominate directors who have well-established views on remuneration, among other issues.
GE and Bank of America should be applauded for this step towards greater shareholder engagement. More companies should be encouraged to follow suit. The next hurdle is for shareholders to actually use the voice they have been given in the boardroom by nominating directors who share their views.
(Note: For those interested, the Harvard Law School has an online forum that contains an excellent explanation proxy access and its pros and cons here).
Following a change to the UK Corporate Governance Code which limits executive notice periods to one year, Towers Watson reports that Old Mutual Global Investors is now leading a campaign to further reduce the standard notice period to substantially less than that. Support for this position has been seen from the Investment Association, National Association of Pension Funds and the Financial Reporting Council.
Outrage over termination payments and executive notice periods is not a new phenomenon. Most recently, outcry followed termination payments given to outgoing executives at Tesco following a major accounting scandal that hammered Tesco’s share price. Shareholders were angered that Tesco’s former CFO was paid a £970,800 termination payment, in addition to his salary during the notice period, despite the scandal in his department. It would take 35 years for someone making the current average UK salary of £27,200 to earn what Laurie McIlwee earned for resigning amidst scandal.
Situations such as Tesco’s have brought notice periods and termination provisions into a bad light. However, contractual notice periods play a very important role in enticing talented executives to leave secure positions at other companies. Boards must have the flexibility to ensure that they can recruit top talent even if that talent is entrenched in a secure position at a competitor. Skilled executives are unlikely to leave a sure-deal for a risky unknown without some downside protection.
While lengthy notice periods and bulky termination payments should not be standard features in every executive’s contract, a blanket proclamation limiting all notice periods to a period substantially shorter than 1 year would not be in a company’s best interests. Companies must have some flexibility in cases where a lengthier notice period is truly necessary for recruitment. Hopefully Old Mutual will allow for such flexibility in its campaign.
Asset managers manage shareholders’ investments in company shares, acting as agents charged with ensuring that companies are compliant with principles of good corporate governance. Any time an agent acts on behalf of a beneficiary, there is the potential for a conflict of interest to arise. This occurs when the interests of the beneficiary and the interests of the agent are not aligned.
One particular corporate governance principle that asset managers are responsible for overseeing is the transparency and legitimacy of executive pay. Oversight of this principle gives rise to a potential conflict of interest between asset managers and the ultimate shareholder. Asset managers indirectly benefit when executives and managers of public companies receive higher salaries, as they are more likely to be able to demand higher wages themselves. In fact, the Financial Times reports that asset managers could be paid more on average than investment bankers within the next year, indicating that they are already firmly entrenched in what the High Pay Centre calls the “high pay culture.” The Institute of Directors argues that when asset managers are part of the high pay culture, they are less likely to protest against the culture of high pay at other companies.
In order to minimize this agency problem, shareholders should be armed with tools to ensure that asset managers act in their best interests. One such tool is information: asset managers should be required to disclose how they vote on resolutions raised at annual general meetings, including those on a company’s remuneration policy. Requiring the disclosure of this information would enable shareholders to demand both explanation and action from their fund managers on important issues.
The Financial Times has also reported that the Institute of Directors is calling for fund managers to disclose their pay levels and policies to clients. The disclosure of remuneration policies at asset management firms would provide useful information to shareholders on the incentives facing fund managers. It would allow clients to ensure that their asset managers are incentivized to act in their best interests.
However, disclosure of actual pay levels would be counterproductive. When public companies were required to disclose executive remuneration levels, we began to see companies using high pay at other companies to justify their own remuneration levels. As a result, we have seen huge pay packages become the market standard as companies benchmark themselves against one another. The requirement to disclose executive remuneration has resulted in a situation where it is very difficult to restrain pay. If fund managers are required to disclose this information, it is likely we would see the same result. A fund manager could use pay at a competitor to justify demands for a raise.
More transparency and information from asset managers is definitely needed; more justification for higher pay is not. Shareholders should be armed with greater information on how asset managers are incentivized and how they are voting at annual general meetings on remuneration resolutions. However, disclosure of salary figures would not arm shareholders with useful information; it would instead arm fund managers with the tools necessary to argue for even more.
Debbie Collier (co-author of Executive salaries in South Africa: Who should have a say on pay?), has called for unions to push for worker representation on remuneration committees in order to address income inequality within companies. This suggestion was made during her recent presentation at the Federation of Unions’ collective bargaining conference in South Africa. A summary of her remarks can be seen on this SABC news segment.
The recommendation to involve workers on remuneration committees is not unique to South Africa. The UK’s Trades Unions Congress has made a similar proposition. TUC argues that remuneration committees lack diversity because most members have been directors for many years and often serve on the remuneration committee of more than one company. Members of remuneration committees make many multiples of the average worker’s wage every year and thus are out of touch with the average worker’s reality. This lack of diversity on remuneration committees impedes real change because the current members have an incentive to maintain or inflate remuneration. By having employees serve as remuneration committee members, the board would be encouraged to consider other viewpoints as well as rates of pay at all levels of the company.
The question is whether South African labour unions will heed the call to actively and productively engage with companies on wages being paid at all levels of a company. South Africa’s system of collective bargaining is unique, not in terms of the letter of the law, but in terms of the atmosphere in which it is conducted. Due to apartheid’s legacy, worker and company relations are strained at best, and violent and deadly at worst. Deep mistrust runs between those at the top and bottom of the corporate structure. South African labour law already provides workers with the right to create workplace forums to engage companies on various issues, but to date, these rights have been largely ignored in favour of traditional adversarial methods of collective bargaining.
Strikes and worker unrest, however, are crippling the South African economy. The violence exhibited by both workers and the police sway businesses away from investing in the country. More productive methods of engagement must be found if South Africa is to move forward. Worker representation on board remuneration committees could be just the place to start this dialogue. Not only would it provide workers with an opportunity to have a (hopefully) productive voice, but it would help companies meet their obligations to remediate historical income inequalities rooted in apartheid.
What do you think? Would giving workers representation on remuneration committees be productive? Or would it just result in one more forum for workers and companies to clash?