Co-ordinated lobbying against exec pay reform

Last week at work, whilst doing a bit of research into employers' views on the idea of employee representation on remuneration committees, I noticed that some well-known FTSE100 constituents had submitted identically worded responses to the 2011 BIS consultation which sought views on the issue.

For instance, here's what SABMiller said:

No. We do not believe that anyone should be a member of the Remuneration Committees unless they also sit on the full Board, for the reasons explained earlier, namely that it is not appropriate for anyone to be involved in setting remuneration policy structures and levels, who has not participated in discussions relating to overall strategy. This applies as much to employee representatives as to anyone else.
Including employees on remuneration committees would also potentially create a conflict of interest for the employees as they are not independent and, depending on the scope of the Remuneration Committee, may be participating in decisions that impact the structure of their own pay.
It is unlikely to be practicable to find a suitable employee representative who can effectively represent the views of all employees, particularly in globally diverse companies. There is significant scope for the views of an employee representative to be driven by local issues relevant to the location where they work, rather  than the global interests of the company and shareholders as a whole.
The UK Corporate Governance Code already requires Remuneration Committees to be sensitive to pay and employment conditions elsewhere in the company.

Compare that with Tesco's response, which included, amongst other text, the following:

Including employees on remuneration committees would potentially create a conflict of interest for the employees as they are not independent and, depending on the scope of the Remuneration Committee, may be participating in decisions that impact their own pay. 

The UK Corporate Governance Code already requires Remuneration Committees to be sensitive to pay and employment conditions elsewhere in the company.

There's also some  very similar, and in places identical, text in the responses from BT and Smith & Nephew.

And, finally, here's the response from the GC100 (representing company secs and general counsels in the FTSE100):

We are not supportive of compulsory employee representatives on Remuneration Committees unless that person also sits on the full Board for the reasons explained earlier, namely that it is not appropriate for anyone to be involved in setting remuneration policy structures and levels, who has not participated in discussions relating to overall strategy.Including employees on remuneration committees would potentially create a conflict of interest for the employees as they are not independent and, depending on the scope of the Remuneration Committee, may be participating in decisions that impact the structure of their own pay.
The UK Corporate Governance Code already requires Remuneration Committees to be sensitive to pay and employment conditions elsewhere in the company.
We do not advocate employee representatives on Boards, although we recognise that this can work well for some companies and indeed is recognized in different legal systems, where companies have supervisory boards and management boards, with different responsibilities and accountabilities. In some circumstances, an effective employee representative can communicate employee issues to the rest of the Board and also explain the Board’s thinking and reasoning to employees. In many cases however, it may not be easy to find a suitable employee representative who can effectively represent the views of all employees, particularly in globally diverse companies. There is significant scope for the views of an employee representative to be driven by local issues relevant to the location where they work, rather than the global interests of the company and shareholders as a whole.

And it's the same story in responses to other questions in the consultation, such as the proposal for shareholder representation on nomination committees, or for a binding shareholder vote on pay.

So, clearly, someone has produced a text which a number of big PLCs have simply cut and paste, with a few tweaks (perhaps to make them look less generic?) in their responses. My guess (and it is just a guess) is that the GC100 response might be the common text that was drawn upon. This is simply because that seems to be a way that many big PLCs would have seen the same doc. However, whatever the source, is this really any different in principle to generic campaigning emails that NGOs send out? Yet, in this case, we are looking at major companies looking to influence a consultation on a key governance issue.

Having discovered this, and being aware of a previous example of this happening, I wondered whether this had happened in relation to any other consultations. Looking at PLC responses to the 2012 BIS consultation on its actual executive pay reforms, I found the same thing going on, albeit with a slightly different group of companies.

For example, here's what Astrazeneca said about the idea of requiring a higher vote threshold to pass executive remuneration policy votes:

AZ notes that the Department for Business, Innovation and Skills (“BIS”) has recognised that raising the threshold to 75% would be inappropriate. AZ considers that setting an arbitrary threshold between 50% and 75% seems illogical when matters of potentially greater significance can be passed with a vote of 50%. AZ supports a 50% threshold.

And Kier Group:

Kier is particularly concerned with the proposal potentially to raise the threshold. The Government has rightly recognised that raising the threshold to 75% would be inappropriate, but suggesting an arbitrary threshold between 50% and 75% makes little sense when matters of equal or, perhaps, greater significance can be passed with 50% of the votes. Setting the threshold at above 50% would, in effect, make the vote on remuneration more important than most matters shareholders are asked to vote on.

And Marks & Spencer

We have concerns with the proposal to potentially raise the threshold of shareholder support required to pass the vote on remuneration policy. The Government has rightly recognised that raising this threshold to 75% would be inappropriate but have suggested an arbitrary threshold of somewhere between 50% and 75% makes little sense when matters of greater significance can be passed with 50% of the votes. The threshold should therefore remain at 50%.

And Rio Tinto

We disagree with this proposal. The Government has rightly recognised that raising this threshold to 75% would be entirely inappropriate. An arbitrary threshold set somewhere between 50% and 75% also makes little sense when matters of greater significance to a company, such as M&A transactions, can currently be passed by shareholders with 50% of the votes. This would effectively make the vote on remuneration of more importance than most matters shareholders are asked to vote on and is simply illogical. We therefore recommend maintaining a 50% hurdle for shareholder approval of the remuneration policy, consistent with the approach that is taken to other matters of ordinary business at the AGM, e.g. the advisory vote on the remuneration report, director re-elections, etc.

And SABMiller

We believe that raising the threshold of shareholder support required to pass the vote on remuneration policy is an extremely negative and dangerous proposal, and completely unnecessary to achieve the desired purpose. Imposing an arbitrary threshold set somewhere between 50% and 75% makes little sense when matters of greater financial significance – such as the appointment of the directors in the first place, or the approval or the acceptance of a takeover offer, or the payment of a dividend - can be passed with a 50% vote, and many major business decisions, such as spending billions of pounds on a new factory do not require a shareholder vote at all. This would effectively make the vote on remuneration of more importance than most matters shareholders are asked to vote on.

So, again, we see an underlying common text being tweaked a bit, but basically the same point in the same words being used. And, again, it's not just the response to one question. For example, there is similar text in several of the responses to the proposal for a binding vote.

Here's an excerpt from Astrazeneca's response:

Shareholders have had an advisory vote on companies’ remuneration reports since 2002. AZ observes that this has improved communication on remuneration policy between companies and shareholders generally.

And M&S:

We believe that the current advisory vote enjoyed by shareholders since 2002 has had a very positive effect in improving the communication between companies and shareholders.

And Rio Tinto

Shareholders have had an advisory vote on the remuneration report since 2002 and, of course, have always had an opportunity to engage with investee companies through regular investor relations interactions, including AGMs. Equally, shareholders have long had available to them the “nuclear” option of removing a director, or directors, including, in this case, the chairman of the remuneration committee. The advisory vote on the report has, it is generally acknowledged, had a very positive effect in improving communications between companies and their shareholders.T

In defence of the companies, one might argue that, if they agree with the views expressed, then does it really matter? Funnily enough, I think that argument would carry more weight if they hadn't tried to disguise the fact that a common text was being used. By changing it a bit, one might infer that companies know that simply sticking in a carbon copy might mean that the response was taken less seriously.

Anyway, there are now at least three cases of this happening and I have a strong suspicion that it has also occurred elsewhere.

One final point - companies often legitimately moan that shareholders focus too much on executive pay, to the exclusion of more important issues like strategy. But it's striking that this kind of co-ordinated lobbying occurred in respect of two consultations on... err... executive pay. They didn't do it in response to the BIS consultation on short-termism (the one before Kay) - there were very few corporate responses to that one. So maybe PLC's priorities are a bit skewed too?

Engagement architecture

Two seemingly related developments. First up, the membership of the working group that will try and get John Kay's idea of an investor forum off the ground has been announced. 

Chairman	James Anderson	Partner, Baillie Gifford
	Peter Harrison	Global Head of Equities, Schroders
	Claudia Kruse	Managing Director, Governance and Sustainability, APG
	Ida Levine	Director & Senior Legal Counsel, Capital International
	Richard McIndoe	Head of Pensions, Strathclyde Pension Fund
	Sacha Sadan	Director of Corporate Governance, LGIM
	Victoria Sant	Investment Manager, The Wellcome Trust
	Robert Talbut	Chief Investment Officer, Royal London Asset Management

This seems to correspond with a revised terms of the reference for the Institutional Investor Committee, which looks to be focusing back on lobbying on policy.

IIC revised Terms of Reference (updated May 2013)

The Terms of Reference of the IIC are as follows:

Following the authority given to it by its member associations, the Institutional Investor Committee will:
• Complement the policy work undertaken by its member organisations, facilitating better co-ordination and establishing a single voice on issues of common interest;
• Focus on policy issues which impact institutional investors and their stewardship of investee companies;
• Represent the interests of institutional investors to governments, regulators and other relevant bodies in the UK, EU and Internationally;
• Co-ordinate engagement with relevant organisations on relevant policy issues, however, will not seek to coordinate direct investor engagement with companies, this being considered more appropriately coordinated by investors themselves.

So under the last bullet the IIC loses the stewardship/engagement role (which, if you remember, was what it was originally supposed to be all about) but the trade bodies will collaborate over lobbying policymakers.

"Sensitive to pay and condition..." once more

I've blogged previously about the way that companies routinely fail to apply the bit of the UK Corporate Governance Code that says that rem comms should "be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases."


Well, if I didn't just stumble across evidence of this in the words of a company itself. Being the sad man that I am, I was recently trawling through company responses to the BIS discussion paper on exec pay that led to the incoming pay reforms. I was specifically looking for views on the idea of employees on rem comms. And in one company's response I came across this as one of the reasons why this would be A Bad Idea -

Difficulty in preventing other employment issues affecting the discussions.

So the Code says that rem comms should be sensitive to "pay and conditions", but a company is worried that employee representation would lead to "other employment issues affecting [rem comm] discussions".

When I  get a bit more time I'll see if I can find some more like this.

Afren defeated, again

Afren saw its remuneration report voted down today. It was a stonking vote against, almost 80%, and is the first remuneration report defeated this year (not the first defeat on pay this year though). It comes after a bit of commentary on the lack of a Shareholder Spring 2.

However it's also the second time that Afren has lost the vote on its remuneration report, having also been defeated in 2011. I think that this is the first company to lose the vote on its remuneration report twice since the requirement to have a vote came in at the end of 2002.

But actually Afren's history of pay revolts goes further back. As I blogged back then, in 2010 although its remuneration report passed on a straight for/against split, if you include abstentions then the vote in favour dropped to 40%.

Luckily though, two defeats and a near miss in the past four years have clearly made the company sit up and take notice. As they say today "Our remuneration philosophy reflects the need to retain the most able people in a highly competitive talent market and we will provide appropriate rewards for exceptional achievement leading to the long-term increase in Company value."

Err...

More signs of progress?

I had a quick look at the voting and engagement policy adopted by NEST (available here) and was interested to see this line about executive pay.

The heavy linking of pay to performance for already high achievers is unlikely to produce the motivational drivers that investors want executives to be energised by.

To state the obvious, policy doesn't not equal practice - certainly not when it comes to some asset managers in my experience - and this is just one sentence in a large doc. But you wouldn't have found a sentence like this in any investor's corp gov policy even two or three years ago. Now, in addition to NEST, there are bits on the motivational aspects of pay in docs published by Hermes, LAPFF and BlackRock and maybe others I am not aware of. (As an aside, it strikes me that an obvious next step is for the Corporate Governance Code to be amended.)

In addition, as I've previously blogged, the rem consultants are alert to a shift in thinking. PwC have gone by far the furthest, really questioning the value of incentive pay for execs, and making the point that linking reward to performance tends to push the overall level up.

I think we'll also start to see greater policy focus on this as an issue and I personally hope that Labour gets stuck into it.

In the three plus years I've been blogging/reading/thinking about this in detail I can definitely see there has been a shift in opinion, and this is becoming more pronounced. Given the way performance pay is embedded into unthinking UK corporate governance practice this is a long-term battle, and it is still very early days. But in the battle of ideas about pay I think we're making some progress.

Turkey

While all eyes are on Turkey, it's worth remembering that this is a country where there have been alleged abuses of workers' rights in a major global company - Deutsche Post DHL. Text below from the ITF website about questions raised at last week's AGM.

DHL provides “unsatisfactory” answers over workers’ rights abuses
31 May 2013

Deutsche Post DHL provided “unsatisfactory” answers to the barrage of criticism and questions about its record of workers’ rights abuses from shareholders at its AGM in Frankfurt, Germany on 29 May, according to the ITF.

The ITF and UNI Global Union led the charges against the company, both inside the AGM and at a protest outside with members of the ver.di union and the Turkish community. Journalists at a press conference beforehand heard accounts from Aysel Simsek, a DHL Turkey employee who believes she was unfairly dismissed, and senior representatives of the ver.di and Tumtis unions, ITF and UNI. 

The ITF and UNI claim that the logistics giant would never dare commit in Germany the abuses it practises elsewhere. They have evidence that the company has backed fake unions and unlawfully fired workers in Turkey; used lie detectors against staff in Colombia, Panama and South Africa; and relied on agency workers on lower wages and with no job security in the UK, Malaysia, Indonesia and India.

Speakers at the AGM included ITF global head – supply chain and logistics Ingo Marowsky and UNI Europa post and logistics officer Cornelia Broos.

Marowsky commented afterwards: “The company’s behaviour in many countries where it operates risks alienating shareholders and clients. Around half the speakers at the AGM raised the issue of workers’ rights. Yet it became shockingly clear that not only is Deutsche Post DHL failing to implement its corporate social responsibilities and corporate governance responsibilities but it doesn’t even seem to know what’s going on in its own operations.

“For example, the chief executive officer, Frank Appel, doesn’t know how many unions or works councils they’ve got. They don’t track industrial problems. Court cases apparently ‘just happen’ in such a large company. They are not up to speed with events in DHL Turkey, don¹t want to share their investigation of events there and claim they don’t need a joint investigation.  Such unsatisfactory responses do not inspire confidence.”

Marowsky added: “It was interesting to hear Appel admit that under Turkish law DHL does not have either a recognised union or a collective bargaining agreement. The company has denied up till now our claims that it didn’t have a proper union or CBA in Turkey.”

The ITF and UNI, working with the International Labor Rights Forum and SumOfUs, have raised these matters with several major DHL customers, including Adidas, Apple, IKEA and Marks and Spencer, who have put these concerns directly to DHL.

For more information on the DHL campaign visit ‘respect at DHL’ or the ITF’s campaign page.

A few things Labour could do

Thought I'd sketch out a mixture of what Labour has committed to in the corporate governance area, what could be broadened out, and a couple of additions...

Stick with existing policy as set out in the 2010 manifesto

Tougher rules on takeovers - a higher threshold to approve deals, a qualifying period to vote on them, exploration of public interest test.

Mandatory voting disclosure - won't repeat myself here, but most important thing is to agree the disclosure framework. Who should it cover, how and when should they disclose?

Broaden out existing commitments

Labour is committed to employee representation on rem comms - why not open this out in the shape of a broader review into corporate governance? This could include both employee voice, looking at how representation on boards - not just rem comms - could work, and shareholder engagement (the Swedish nom comm model).

Extra bits

Undertake a proper review into pay, including research into the effectiveness of executive pay (does it improve performance?). There is plenty of evidence that the large proportion of variable pay executives receive is unlikely to 'work', and, in my opinion, performance-linkage instead principally serves to make high pay less open to challenge (that may be its real purpose now). Lots people in the system don't buy that it works, so why continue with it?

Make it easier to file shareholder resolutions. Drop the filing threshold to say 1% and let filers combine to meet it - eg two investors with 0.5% each.

Encourage beneficiary empowerment. It is striking how even now beneficiaries have almost no formal representation within the financial system's architecture, or when reform is undertaken. Look back at the range of people involved in the Wilson Committee, could we establish a standing body with similar stakeholder representation to look at governance/ownership issues?

Exhibit more scepticism in the face of lobbying - trade bodies will tell you that practically any reform will have disastrous unintended consequences, yet these claims often prove to be false. In addition, if we're serious about 'responsible capitalism' we can't let investor trade bodies have too much power in determining policy.