The Queen’s Speech last week set out the government’s legislative plans for the parliamentary year.
One of the main features of the speech is the proposal to increase shareholder voting rights as a binding check and balance on executive pay. The current system allows shareholders to vote on executive remuneration but these votes are persuasive, not restrictive.
The proposals come as a succession of FTSE 100 bosses have recently had their pay roll either completely rejected or rebelled against by shareholders, Aviva, AstraZeneca, Barclays to name a few. This has resulted in the resignation of many including Andrew Moss of Aviva and Sly Bailey of the Trinity Mirror. The criticism of executive pay also led Stephen Hester of RBS rejecting his £1 million bonus earlier this year.
The main debate is whether the shareholder criticism is directed at the level of pay itself or the proportionality of the pay. Indeed, many executives of FTSE 100 companies have gone unscathed. The main issue seems to be that shareholders do not want executives rewarded excessively for poor performance when shareholders do not receive the same dividend when businesses are performing averagely or, indeed, failing. The proposals appear to attempt to curb the trend that executives are routinely paid excessively as an unmerited reward. Equally companies must offer a competitive salary which attracts and retains talented executives to drive the success of the business.
The proposals to increase shareholder voting rights results from a call for the remuneration of directors to be much more linked to the performance of the business; and to ensure this, shareholders will have to be more actively involved in the governance of the companies to end disproportionate distribution of profits.
The Business Secretary Vince Cable launched a Consultation on the 14th March 2012 to consider the following:
- An annual binding vote on future remuneration policy
- Increasing level of support required on votes on future remunerations policy
- An annual advisory vote on how remuneration policy has been implemented in the previous year
- A binding vote on exit payments of more than one year’s base salary
Also being considered is the voting threshold for shareholder approval of remuneration. Vince Cable has indicated that the proposals may involve the approval of big bonuses being subject to more than simple majority. In order to secure large bonuses, executives may have to achieve a 60% or 75% majority in favour.
This trend, coined as the “Shareholder Spring” looks like executives will be facing much more scrutiny from shareholders in the future.