When shareholders topple CEOs

By Felix Salmon
May 8, 2012
Shareholder Spring.

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The Telegraph has dubbed it Shareholder Spring: in the UK, these days, CEOs are falling left and right after shareholders complain about their pay. First came David Brennan, the CEO of pharmaceutical company AstraZeneca, who decided to spend more time with his family after shareholders made it clear they wanted him out. Next up was Sly Bailey at publisher Trinity Mirror, who was also facing a shareholder revolt. Now it’s the turn of Andrew Moss, the head of insurer Aviva, who waited until after shareholders voted against his pay package before handing in his resignation.

Mark Kleinman notes something very interesting about the Aviva vote: while a majority of shareholders voted against Moss’s pay package, less than 5% actually voted against him staying on as chief executive.* The former vote, on pay, was non-binding, while the latter vote was binding — and clearly almost no shareholders had the appetite to actually fire Moss, even if that was what they ultimately ended up doing. In the UK, says Kleinman, “the effect of the pay vote was to leave Moss in an untenable position”. At the same time, says Helia Ebrahimi, “Man Group chief executive Peter Clarke is currently hanging by a gossamer thread after shareholders turned on his remuneration package”.

In the US, of course, none of this is true: Citigroup CEO Vikram Pandit is still comfortably ensconced in his position, despite clear shareholder rejection of his compensation package.

I suspect that what’s going on in the UK is a harbinger of what will happen, eventually, in the US. One can’t expect a perennially tone-deaf company like Citigroup to set the tone for corporate America as a whole — this is a firm, remember, which honestly thought the Fed would allow it to buy back $8 billion of its own precious equity. And if you don’t listen carefully to your regulators, you’re definitely not going to listen to your shareholders.

But as we see more pay package rejections in the US, I think that CEOs with cleaner ears will prove themselves capable of understanding the message being sent. After all, few shareholders vote no on pay with the thought process “I think you would be a great CEO, just as long as you earn a little bit less money”. These votes are a clear rejection of cronyism at the board level, and it behooves boards to start listening.

I might be dreaming, here, but in the age of Occupy, there’s a case to be made that boards are just a little bit more aware than they used to be that they answer to shareholders, and that the biggest shareholders — pension plans, mutual funds, that kind of thing — are ultimately representing the interests of the 99%. So long as the masses stand idly by, the plutocrats will happily award themselves ever more obscene quantities of money. But when shareholders notice and object, CEOs like Andrew Moss know that the gig is up.

*Update: Originally I said that more than 95% of votes were cast for Moss staying on as CEO, that’s wrong. Only 4.6% of votes were cast against him, but another 5% or so were withheld.


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I disagree. I think plenty of shareholders believe that CEO compensation is a problem even if the CEO is performing well. CEO packages frequently insulate the CEO from consequences of poor performance while rewarding CEOs for market wide phenomena.

Posted by Zdneal | Report as abusive

Is this finally an outbreak of reality setting in? I hope so – it’s been absent from the world of the corporate executive and investment markets for some time now. However, the honourable resignations in the UK contrast with the lack of such moves in the US, according to your report. So I can’t see why you suggest the Occupy movement is the cause – they are practically invisible in the UK yet reportedly everywhere you look in the US. Occupy seem stronger where CEOs hold on until the last greedy fingertip can be prised off the pile of gold they cling to, limpet like.

That raises an interesting question: Are CEOs responsive to the complaints of the 99% as enunciated by Occupy, or is the Occupy movement a response to the amount of greed displayed by CEOs? Your report would suggest the latter, since the UK CEOs took the hint and went.

Hardly surprising really since the UK is suffering from rampant austerity which is destroying growth, while the US has managed to grow and has thus protected CEOs from the ravages of a shrinking economy. Ironic then that the actions of the CEO supported GOP to introduce more austerity into the US economy through blocking Obama’s economic plans to save it could, if the UK model is repeated, mean US CEOs lose their jobs or have to take pay cuts when austerity hits the US economy as a result of their support for the party of the 1%.

I love irony. It can really hurt when it hits!

Posted by FifthDecade | Report as abusive

Yesterday, it was about how the institutional investors aren’t holding VC’s accountable for their less than stellar performance (to put it mildly). And today you’re hoping those same institutional investors start holding boards and their CEOs accountable? Why the disconnect? The large institutional investors effectively control the boards, and they usually act as a rubber stamp for them. And since boards are typically comprised of CEOs, they usually are very generous to their top execs. What’s going to wake them up all of a sudden? Are they going to get fired if they don’t provide more oversight for CEOs?

While I’m not a pessimist, I don’t see this change happening, without external forces driving it. Corporations were created to distribute ownership of a business, but they have morphed into a vehicle for individuals (often insignificant shareholders) to enrich themselves at the expense of the company. This is a flaw in the “free market” economy, in that executives don’t do what’s best for the company, they do what’s best for themselves. As a result, companies often hoard profits, rather than distribute them (and incur double taxation) or re-invest them (and assume personal risk for those investment choices).

The government can force companies to implement one of those two options with a well-designed tax system (here I go again). If profits that are distributed as dividends are exempt from corporate taxes, companies will have more incentive to pay dividends (where they will be taxed at the individual ordinary income rate). When this becomes more common place, the stock price (of mature companies) will more readily reflect the performance of the CEO, and when dividends and prices are down, they will be held accountable. Currently, so few companies pay dividends that justify their price, so it’s not often used as a yardstick. We need to make corporate performance more transparent, and letting shareholders directly benefit from profits will help that happen.

Posted by KenG_CA | Report as abusive

You’re saying that CEOs will interpret objections to their pay as intentions to fire them, “like Andrew Moss”, even when votes are perfectly clear that that is overwhelmingly false? What would trigger this sort of mass confusion?

Posted by dWj | Report as abusive

I would note that behavioral psychologists have noted that excess compensation decreases performance.

Dan Ariely has written about this.

Posted by Matthew_Saroff | Report as abusive

Actually, I have a very simple approach to deciding to vote for or against the CEO pay packet. I simply divide by 24. If the result is roughly what their average workers are making, fine. If not, the answer is no. It is not a vote on his or her’s performance, it’s a vote on their pay packet. If they don’t want the job for a reasonable amount of money, fine, they can move on. They need to be put on notice that they are not indispensable.

Posted by majkmushrm | Report as abusive

The biggest problem in corporate finance today is the agency problem. Until we resolve this problem, all others are just whistling past the graveyard.

Posted by Enable | Report as abusive

Attempting to tie shareholder toppling of CEO’s to the Occupy movement is laughable – unless I’m supposed to believe that the Carl Icahn’s and Dan Loeb’s of the world are now part of the Occupy movement. With a few exceptions – which become virtually non-existent once you reach really large market cap companies – CEO pay is such a small percent of company earnings that the financial impact is muted.

The real issue with board cronyism, and what really does have a financial impact to shareholders, is a board that isn’t willing to perform its job of overseeing management. Excessive pay for mediocre performance is a symptom, so it can be a useful metric as a signal of other problems, but the real issues are a board that won’t question an imperial CEO as he or she runs the company into the ground. Said differently – a board that won’t question the pay of a mediocre or poor CEO also isn’t very likely to fire a mediocre or poor CEO, which is the real problem. That’s why you see activist shareholders focused on company strategy and changing management, not whether the CEO makes a few million more or less.

Posted by realist50 | Report as abusive