Two strikes and you’re out

The past few weeks have been active ones at UK annual general meetings, as multiple companies’ shareholders have rebelled against their executive remuneration reports. In the past two weeks alone:

  • 16% of shareholders at RSA Insurance voted against its remuneration report;
  • 18% of shareholders at BG Group voted against the remuneration report;
  • 18% of Reckitt Benckiser shareholders voted against the remuneration report;
  • Ladbrokes saw 30% of votes cast against its remuneration report;
  • 28% voted against the remuneration report at Inmarsat, rising to rising to 35% if deliberate abstentions are included;
  • 33% of Centrica’s shareholders cast negative votes against the remuneration report;
  • 36% of shareholders at Tullett Prebon voted against the remuneration report; and
  • 42% of Man Group’s shareholders voted against its remuneration policy, and 34% against its remuneration report.

What will come of these protests? Likely not much. In its response to the 42% negative vote, Man Group stated that the majority of its shareholders were supportive of its remuneration policy. While this is in fact true, a 42% negative vote indicates that something is wrong with remuneration in the company. This outpouring of negativity should not be ignored or brushed off by the executive with flippant remarks.

What will force remuneration committees to react to these negative votes? Currently, so long as 50% of votes are in favour of the remuneration report, there is no requirement for companies to respond when a large proportion of shareholders vote against it. In recent years, Australia introduced a rule incentivizing companies to respond if 25% of votes are cast against their remuneration policies for two consecutive years. If this occurs, shareholders must vote to determine whether the entire board must stand for re-election. Known as the ‘two-strikes rule,’ this has provided motivation for boards to respond to negative criticisms of pay policies.

Perhaps if their jobs were on the line, instead of just their salaries, remuneration committees and executives would have a better response to investors when their remuneration reports receive such negative support. Until then, we must wait for reports to outright fail before we can be assured that we will see action.

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