Tuesday 18 June 2013

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?

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