Shareholder activism bringing changes to executive pay

Increasing shareholder activism is having an effect on executive remuneration in the UK and elsewhere according to consultancy Mercer. This follows the “Shareholder Spring” in the UK, when there were significant votes against remuneration reports at company AGMs in April and May this year. Mercer’s Mark Hoble said: “There is a vocal shareholder revolution taking place, and the UK government and the EU are using this to reform practices.” He added that pay freezes are common in peripheral Europe and regulators are now following the lead set by shareholders, with large pay rises being seen as inappropriate unless justified by performance at a time of austerity.

Legal & General Investment Management (LGIM) was one of the main asset owners involved in voting against contentious pay awards, and LGIM director of corporate governance, Sacha Sadan, said: “Being a responsible shareholder means being active. In our view voting rights must be utilised, with abstentions only in exceptional circumstances.” Sadan added that much work was done behind the scenes, observing that: “Over 50% of the companies that came to LGIM were willing to listen and were happy to enter into constructive dialogue that led to an agreed consensus with their shareholders.”

But he said that there are still two distinct company approaches to pay: “The majority that want to talk to us about pay; and those who want to tell us about pay.” He said the latter group did not see communication as a twoway process and accounted for most of LGIM’s 125 no votes on remuneration reports last year. He said: “Fortunately, this group is increasingly in a minority”. Mercer said in a recent statement on executive remuneration that shareholder pressure is creating a domino effect, pushing regulators into taking action.