Bill Jamieson: Season is too short for the shareholder spring

One of the troubling features of the 'shareholder spring' '“ the term applied to the growing incidence of shareholder revolts over boardroom pay '“ is the phrase itself. It invites comparisons with those popular political revolts in recent years that resulted in very little by way of political improvement.

Lord Smith of Kelvin. Picture: Lisa Ferguson

In any event, criticism of executive pay awards has been far from confined to this spring. I’ve been reporting on them since the early 1980s. And the latest eruptions – at oil giant BP, mining colossus Anglo American and medical instrument maker Smith & Nephew, to name some of the outstanding FTSE 100 companies where pay packages have recently been challenged, show every sign of rumbling on through the summer.

For Scottish investors, all this may seem a battle largely confined to the City of London. But several developments here catch the eye. There has been the growing activism of pensions and life assurance giant Standard Life. For years it was reluctant to voice its concerns in public, arguing that discreet behind-the-scenes discussion was more effective. Now it takes a much more public stance on corporate governance issues.

Meanwhile, as reports of pay revolts grew in number, it was unfortunate that an embarrassing over-statement of boardroom pay emerged at Dundee-based Alliance Trust. An investor at the group’s annual meeting spotted that the amounts paid in bonuses to former chief executive Katherine Garrett-Cox and ex-finance director Alan Trotter were over-stated by £100,000.

The mistake, which was not picked up by the trust’s auditor, Deloitte, related to payments made under Alliance Trust’s long-term incentive plan. No actual money is understood to have been paid out in error, but the debacle will need to be clarified in the trust’s 2016 full-year results.

Alliance Trust chairman Lord Smith of Kelvin, pictured right, said he would order a review to find out what went wrong. The error comes just three years after Alliance Trust overpaid directors in its long-term incentive plan, forcing it to recover the excess in 2013. This came after it used the wrong figure in its vesting calculations.   

Have executive remuneration arrangements become too complex even for senior boardroom members and auditors to spot such errors? Against this troubling background came a counter thrust from Paul Lee, head of corporate governance at Aberdeen Asset Management, arguing that high-profile revolts against the pay of senior executives and angry questions at annual meetings were not the best way forward.

He argued last week that calls for the chairmen of remuneration committees who have lost a vote should be obliged to stand down “don’t make sense… such blood lust probably won’t get us anywhere.”

For shareholders to vote against a pay resolution without explaining why is like “being a petulant child”. Investors, he said, would do better “to put the pitchfork down and start talking to the company.” However, the pitchforks did seem to be effective in bringing about change at Alliance Trust. And the episode makes gallingly clear why remuneration arrangements have to be simplified.

Here I do wonder whether Lee has his boot on the wrong foot. The initial onus, surely, should be on boards of directors to explain their remuneration arrangements far more effectively than they do, rather than chiding troubled investors for not contacting the company and spelling out their concerns in more detail.

Here the observations of Ashley Hamilton, corporate governance manager for Royal London Asset Management, are worth noting. During 2015, a year when financial performance was “not great”, her company had received dozens of requests from companies seeking to increase either base salaries, annual bonuses or long term incentive schemes (LTIPs), with some companies seeking increases in all three.

“In some cases”, she wrote, “the increases were warranted; for example where the company had materially grown in size or pay had truly not kept pace with the market. But in our view, many companies simply did not have a justifiable case for proposing large increases, yet many of them went ahead with them anyway”.

There is, she added, growing unease with the pace at which executive pay has risen in comparison with that of the average worker. Bonuses and LTIPs continue to go up regardless.

She warned, too, of the increasing scepticism among City investors about whether the current model of remuneration is fit for purpose. The Investment Association recently called for simplification of how executives are rewarded.

A “shareholder spring”? This revolt needs to run for all seasons until the system of boardroom pay is simplified, the explanations more convincing – and remuneration consultants put firmly in their place.