Stronger say-on-pay means Shareholder Spring to stay

Proposed introduction of binding say-on-pay shareholder votes in the UK will add to the momentum of the so-called Shareholder Spring. It means shareholders will be firmly focused on executive compensation until macroeconomic conditions improve.

The government’s legislative proposal and consultation coincides with a wave of majority votes against remuneration packages under the country’s existing advisory regime.

Giving shareholders greater control over executive compensation during the Shareholder Spring, and Europe’s economic slump, is expected to boost UK shareholder activism.

It means executive pay will continue to be tied to the broader economy, rather than targets set my remuneration committees.

“Until the world starts revolving on its axis again we will see shareholders paying much more attention to what execs are being paid,” said London-based Latham & Watkins partner Stephen Brown.

The market has queried whether the government’s plan to toughen say-on-pay is necessary. Since advisory voting were introduced a decade ago, the UK has seen only a handful of majority negative votes.

Brown agreed that very few companies blindly ignore shareholder noise on the issue. Introducing binding say-on-pay votes will result in more engagement between boards and shareholders, but it will lead to the same result.

“Also, shareholders have shown that they already have the ability to flex their muscles with the existing rules,” he said. This year’s proxy season, for example, has seen majority negative votes at Aviva, Cairn Energy, Pedragon, William Hill and WPP. Barclays, Cokson and UBM have also experienced large negative votes.

Irrespective of this, parliament is expected to pass the proposal. Brown believes the Shareholder Spring has had an impact on how the regulations will come into force, though. Already, the government has resisted calls to increase the resolution threshold above 50%.

In addition to a binding shareholder vote, the package of proposed reforms includes improvements to the clarity and transparency of how remuneration reports are presented. Brown said this is the more important proposal.

Cultural shift

The Shareholder Spring marks a stark contrast to historical shareholder culture in the UK. As one New York-based partner told IFLRbefore this year’s proxy season: “There is not pushback there like in the US. There is much more deference compared to the US which is much less accepting.”

Indeed, typically UK shareholders would abstain rather than vote against an executive’s pay deal. However the focus on pay disparity and bonuses since the financial crisis is thought to have politicised the shareholder voting process.

The Shareholder Spring represents a broader shift in shareholder activism, as reflected in the conclusions of The Kay Review of UK Equity Markets and Long-term Decision Making released earlier this week.

Lawyers’ concern is that binding say-on-pay will reinforce shareholders’ short-term focus and the unjustified link between executive pay and macroeconomic conditions.

There are examples of UK remuneration packages being voted down even when the executive had met their targets set by the remuneration committee, for example reducing staff headcount or divesting non-core assets. Invariably, this is when the company’s stock prices have dropped.

“It seems the Shareholder Spring has grown so significantly that the underlying concept of pay-for-performance has almost been overshadowed,” Brown said.

Coming across the water

The UK proposal is a worry for some US partners. New York-based Cleary Gottlieb Steen & Hamilton partner Arthur Kohn said, a concern being raised in the US was that giving shareholders binding votes would mean giving shareholders undue control.

This is because most shareholders are not in a position to exercise this type of control, and could lead to unintended consequences.Shareholder lawsuits following the introduction of advisory say-on-pay voting in the US last year is a prime example.

If passed, binding shareholder voting will take effect in the UK from October 2013.

The US is not expected to immediately follow-suit. But this could change if the policy gains enough political favour in the US, and concern over US pay disparity continues.

Mary Alcock, counsel at Cleary Gottlieb in New York said there was concern among practitioners of the policy coming across the water, and for companies paying attention they might rightly be concerned as well.