The social cost of failed stewardship


Eye-watering and unjustified CEO pay packages are corrosive of trust in business and threaten to undermine the public’s support for the way our economy operates.” That’s the conclusion of Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee following publication of the Committee’s Eighteenth Report of Session 2017–19.

Minerva Analytics gave evidence to the Committee on 6th June 2018 and provided written further data and research evidence which is incorporated in the minutes. To save you time, we’ve pulled out the key conclusions from the full report:

On Fairness

“Huge differentials in pay between those at the top and bottom remain the norm. Executive greed, fed by a heavy reliance on incentive pay, has been baked in to the remuneration system. With that comes a public perception of institutional unfairness that, if not addressed, is liable to foment hostility, accentuate a sense of injustice and undermine social cohesion and support for the current economic model.” [p11]

On Regulation

“We are fully supportive of the case for a more empowered, aggressive and proactive regulator that has the ability to take decisive action, where necessary, on executive pay and its reporting. We look forward to the establishment of the new regulator as soon as possible”. [p 11]

On Clawbacks

“We welcome the revised Corporate Governance Code’s improvements on remuneration guidance, such as the requirements to consider the long-term remuneration across the whole workforce and potential reputational risks. But the Code alone is unlikely to be an effective driver of change. We recommend that the new regulator clarifies and strengthens its guidance on executive remuneration with a view to exerting significant downward pressure, avoiding unjustifiable payments and ensuring that, if they are made, they can be readily recovered” [p13]

On remuneration reporting

“We welcome the new reporting requirements but are not convinced that they alone will lead to greater alignment between remuneration and company objectives. We recommend that the new regulator monitors how remuneration reports and better reporting against section 172 of the Companies Act meet the aims of increased transparency and alignment of pay with objectives” [p13]

On employee representation

“We recommend that companies should be required to appoint at least one employee representative to the remuneration committee to ensure that there is full discussion of the link between executive pay and that of the workforce as a whole” [p15]

On pay ratios

“We recommend that pay ratio reporting requirements be expanded to include all employers with over 250 employees and that the lowest pay band be included alongside the quartile data required.” [p15]

On shareholder dissent

“We agree that the focus should remain on those companies which ignore shareholder concerns on pay and recommend that the new regulator explores more effective sanctions than a letter from the Investment Association” [p17]

On share buy backs

We cannot understand why the Secretary of State would want to block the publication of an independent study and recommend that the review of share buy backs is published without further delay. We further recommend that remuneration reports include analysis of the impact on executive remuneration of any share buy backs during the reporting period [p18]

On pay maximums

“We believe that there should be greater certainty in executive pay. This should be balanced by a significant reduction in the maximum that may be earned and that the rewards from good performance should be more evenly shared: there should be a stronger and more visible link between rewards at the top and bottom.” [p 20] and

“… to reduce the risk of Persimmon-type awards and associated reputational damage, we recommend that remuneration committees should set, publish and explain an absolute cap on total remuneration for executives in any year. The new regulator should be more prescriptive and interventionist, where necessary, in pursuit of these objectives and be prepared to publicly call out poor practice or behaviours.”

On bonuses

“We recommend that the new regulator engages with investors to develop guidelines on bonuses to ensure that they are genuinely stretching and a reward only for exceptional performance, rather than being effectively an expected element of annual salary” [p24]

On executive pensions

“We recommend that the new regulator seeks public explanations from any company that fails to deliver alignment on pensions contributions” [p24]

On shareholder engagement

“We welcome the increased attention on executive pay but recognise that much more than engagement will be required to drive a more enlightened and acceptable approach on executive pay.” [p 26]

On Stewardship

“We do not have confidence that [investors] will use these tools and create the competitive market in stewardship that should ideally develop. We understand that investors can exert valuable influence behind the scenes but we believe that their stewardship role includes a wider responsibility to help set the boundaries of acceptable practice on executive pay and to promote long-term performance. This should include a commitment to comment publicly when necessary and a requirement to explain their policies and voting records. The final Stewardship Code should make this explicit and be applied strictly and consistently by relevant regulators, including the Financial Conduct Authority.” [p 29]

On asset owners

“We believe that primary responsibility for changing the environment on executive pay rests with asset owners, rather than asset managers. In this context, we recommend that the guidance in the new Stewardship Code includes a requirement for asset owners to provide much more detailed information about their objectives, including those in relation to executive pay. Given that the Stewardship Code is only advisory, and that existing Code has been widely ignored, we recommend that the new regulator is given the necessary powers to take effective action against those asset owners that do not sign up to, or meet their responsibilities, under the Code.” [p30]

On proxy advisors

We recommend that proxy agents tailor their policy guidelines and advice to individual investors so as to resist excessive and poorly designed pay policies and awards. [p31] (NB: custom policies are Minerva’s default position)

On the investment chain

“At present, we do not believe that the incentives of all those involved in the investment chain are sufficiently aligned and attuned to the wider social responsibilities of companies. Nor do we believe that it is realistic to expect better stewardship to be an effective driver of reform of executive pay. We agree with the Kingman Review that, even its revised version, the Stewardship Code is not fit for purpose. We recommend that the new regulator revises the Stewardship Code to ensure that it is able to not just encourage, but deliver, genuine and effective engagement between companies and their shareholders on executive pay in a way that requires both parties to discharge their responsibilities transparently and accountably.” [p31]

Last Updated: 26 March 2019
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