How the financial sector has failed us on fat cat bonuses

Iona Bain

Theresa May has announced plans to give workers a greater say on executive pay today. But are fund managers – who invest our savings and pensions in big business – doing enough to challenge bloated bonuses?

The Financial Reporting Council has started naming and shaming institutional investors who breach its stewardship code, introduced in 2010 to force institutional investors to hold investee companies to account on issues like executive remuneration.

Companies  who have failed to meet the code’s requirements from July 2016 include Brewin Dolphin, Charles Stanley, Franklin Templeton Investments, Miton Group and Neuberger Berman. A number of other major investors such as Pimco Europe, Ashmore Investment Management, Baillie Gifford and T Rowe Pirce were also told they needed to do better.

Fund managers who shirk their stewardship duties could face expulsion from the code unless they clean up their act within six months.

It all suggests that the political war on runaway rewards has so far failed. Vince Cable was very vocal on the issue while in government and Ed Miliband pledged exactly the same rules being discussed now when he was leader of the opposition.

The Chartered Institute of Personal Development declared salaries at the very top to be “out of control” in a scathing report published last year, saying chief executives have gone from earning 47 times more than their lowest-paid worker in 1998 to 183 times more today.

The 36-page study said: “The government claimed its reforms would provide shareholders with new powers to hold companies to account, while making it easier to understand what directors were earning and how this links to company performance…however, there is little evidence that the status quo has been disturbed in any meaningful way by these reforms.”

It cited research conducted by the High Pay Centre, which revealed that the average shareholder vote against FTSE 100 remuneration reports in 2014 was just 6.5 per cent. Only two FTSE 100 companies – Burberry and Intertek – lost an advisory vote on their remuneration reports in 2014.

It said: “There has been no majority binding shareholder vote against a FTSE 100 company’s remuneration policy since the binding vote was introduced in 2013.”

Research by ShareAction, an investor rights charity, has also claimed that several asset managers, including BlackRock, Aberdeen and Schroders, backed controversial company proposals too frequently.

Catherine Howarth, chief executive of ShareAction, insisted that exposing those institutional investors who routinely side with management on pay votes has made them more accountable. She said: “Although some still do not publish their voting records, we have seen big improvements in transparency on voting decisions by asset managers, and the data shows a clear connection between transparency and a willingness to vote down big pay deals.”

This could mean that Britain will eventually follow America’s lead in forcing companies to publish the disparity in wages between bosses and average employees. One non-profit body – Pay Compare – has started publishing such ratios on its website, though the vast majority relate to councils and public bodies at present. The group is urging investors and members of the public to write to FTSE 100 companies as so-called “ratio requesters”, using its online template.

Colin McLean, co-founder of SVM Asset Management in Edinburgh and a regular commentator on governance issues, said: “The area that is perhaps easiest for shareholders and boards to tackle is the issue of incentives with easy hurdles, such as references to very narrow peer group comparisons. There are a number of incentives that look like simply being paid a bonus for doing your core job.”

But he warned that even an active board pressurised by engaged shareholders “can only collect information from remuneration consultants that is pegged to what everyone else is doing”.

Mr McLean said he welcomed the FRC’s declaration but was concerned that its plans “may not be very effective and would require a lot of resource and paperwork to verify”.

ShareAction has been encouraging individual shareholders to attend the annual general meetings of FTSE companies to raise the issue, and insists that progress is being made. Ms Howarth said pension savers should be alarmed about elaborate pay deals that incentivise “short-term profiteering” that works against “long-term wealth creation”. She added: “Pensions auto-enrolment means we all have an equity stake in big companies around the world, and we want the management of those companies to show some pay restraint or we’ll have that bit less to retire on when the time comes.

“We have enabled thousands of savers to email their pension funds asking them to vote down excessive pay deals. Pension funds are institutional investors but they manage the savings of individuals, who can make a real difference by making their views known to their funds.”

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