The Guardian: Calm after the storm in the pay wars
Monday May 24, 2004
Shareholder protests muted by summit
Compared with the pantomime of last year, this month's GlaxoSmithKline annual meeting was a muted affair. The number of protesters could be counted on two hands - a few head office employees of trade union Amicus, a couple of campaigners against animal testing and four people with pig snout masks protesting about Aids drugs.
Last year, even City investors registered their protest about the excessive salaries of the directors, and voted against the firm's pay for the first time. The unapologetic chief executive, Jean-Pierre Garnier, attracted a circus of protesters and acres of publicity for his £22m severance package and seven-figure bonuses.
This year GSK defused the issue with a new pay deal for its directors, and 82% of voting shareholders supported it. Yet the remuneration is unusually generous - Mr Garnier could get up to £18m if the firm performs well compared to its peers - and there is no limit on the amount directors can get.
The level of protest has been lower this year at other controversial companies, from Barclays to Reuters. An eye-popping £44m pay package for Sir Martin Sorrell at WPP raised some eyebrows, but few shareholders voted against it once minor concessions were made.
"This year things are different, there is an awful lot more dialogue between companies and shareholders," said Anita Skipper, head of corporate governance at Morley Investment Management. "Last year the atmosphere got a bit aggressive. The companies were surprised and shocked and concerned about it, and even shareholders found it hard to manage. We are used to dealing with things behind closed doors, we felt it was getting slightly out of control."
At the start of this year the new era in shareholder activism looked likely to continue. Investors succeeded in preventing Michael Green from becoming chairman of the merged ITV and publicly blocked Sir Ian Prosser from chairing Sainsbury's. Investors have new powers to vote at annual meetings on directors' remuneration - but not to throw them out.
Unusual factors inflamed last year's rows. "You got an extraordinary balance of factors, there were new remuneration report regulations, the fact that there was some quite disappointing performance by companies and still the aftermath of the bubble," said Peter Montagnon, head of investment affairs at the Association of British Insurers. "That ignited a mood which was more tetchy than the mood that exists at the moment.
"What's changed is the market has improved and performance has improved. And it is the second time round with the remuneration report regulation, so quite a lot of baggage has been exposed and dealt with last year. Also, companies have understood in this new era they have to be more careful to explain to shareholders what they are doing and why, so there is better dialogue. Quite a lot of problems are being forestalled, we are talking more, that is a very good thing."
Payment for failure
At GSK there was a big effort to avoid another rebellion, and the firm has been in negotiations with shareholders all year.
Shareholders won a victory, too, in one of the major corporate governance battles. Opposition to "payment for failure" was championed by investors, trade unions, politicians and even business groups. The main antagonism was two-year contracts, which meant chief executives ousted for incompetence could be in line for up to 24 months' pay and bonuses. Only a handful of big companies still have directors on such contracts, and large firms such as Invensys, Dixons, Compass and Kingfisher have backed down. It was the most controversial part of GSK's former pay policy, and its removal appears to have calmed investors.
The issue of "fat cat pay" - whether successful chief executives should have their pay curbed - does not excite the City as much. "There is a significant proportion of the market who are not prepared to deal with the issue of quantum," said David Somerlinck, corporate governance manager at Pirc, one of the most outspoken of the shareholder advisory groups. According to Pirc's figures, last year basic salaries of FTSE 100 directors increased 7.2% while bonuses rose 14.5%, continuing the trend that persisted during the bear market. "They appear to be prepared to sit back and continue to let the upward spiral continue," Mr Somerlinck said.
One of the main agitators appears to have undergone a mood change. The National Association of Pension Funds last year took a stand against pay at several large companies, including Barclays, GSK, Reuters, Shell, Schroders, EMI and ICI. Less radical than Pirc but respected as the trade association for pension funds representing more than £600m of investments, it would stand up and shout if a company didn't listen. It put all its recommendations into the public domain, ensuring its criticism of pay policies received ample press coverage.
This year the organisation has barely stuck its toe in the water, let alone made waves, and withdrew support for the remuneration reports of only three companies. It supported the GSK pay package this time round, when even the previously more conservative Association of British Insurers flagged up concerns.
The organisation attributes that to improved boardroom manners. "We have certainly seen a very significant change in corporate behaviour," said Christine Farnish, chief executive of the NAPF. "There has been a sea change in the number of companies beating a path to our door to talk to us, they have wanted to put things right well before the agm season."
Some investors had also become concerned that their actions were going to harm British industry. "UK companies are fairly well behaved compared with some US companies for example," said Ms Skipper. "I don't think it would have done UK plc any good if that antagonism had continued. Over time, would anybody have actually wanted to be a director of UK plc?"
Companies and their directors had begun to complain about the methods of the new militant shareholder groups. There are several gripes, according to one senior investment professional. One is that the fund managers and shareholder groups advocate different codes of corporate governance. Another is that investors are just "box ticking" and opposing a practice even if there is a good reason for it. Thirdly, chief executives say they are being told how to run the company by fund managers whodon't know what they are talking about.
Business leaders complained publicly about the rigid corporate governance rules and their effect on business.
The two sides called a "peace summit" in March, hosted by the CBI and the Investment Management Association. Investors and corporations said they intended to avoid many of the annual meeting embarrassments of last year. Lindsay Tomlinson, IMA chairman, said representatives should meet in regular working groups and CBI director general Digby Jones added: "The importance of direct dialogue in private sittings has been recognised and further meetings will take place over the coming months."
There is a meeting at the IMA this week to plan the next stage in the détente, with another summit in June. "Companies aren't perfect but they are probably better in communication than they have ever been in history," Mr Jones said.
Some sources say the fights are still occurring, but in private. "Very few corporate governance issues get to the press," said one investment professional. "I think there is still quite a gulf between the two sides."
Ms Farnish warns: "If things no longer improve ... we will be the first to speak out."