Global Investing

Making the most of the shareholder spring

October 3, 2012

We’ve had a fair while to ponder the implications of a British AGM season which saw investors oust a few CEOs and deal bloody noses to a few others. We’ve also had some data which implies the revolt wasn’t as widespread as advertised, but Sacha Sadan at Legal and General Investment Management thinks we have seen something important, and something that must be exploited.

His take is that austerity is at the heart of the matter. While the public suffers in a faltering economy, and investors stomach dwindling returns, it was never going to fly that pay deals for bosses should survive unchallenged. Add to that government and media pressure on remuneration, plus a new era of investor collaboration thanks to the stewardship code, and you get an ideal set of factors to drive the ‘shareholder spring’.

Of course, austerity won’t (let’s hope) last forever; governments are unlikely to sustain a narrative around ‘fat cat’ bosses; and the media always moves on. For Sadan that makes it crucial for investors to strike while the iron is hot.

Governance chiefs at the big British fund houses are fond of saying that their best work goes unnoticed. They say that their diplomatic efforts behind closed doors, in delicate negotiations with CEOs and their boards, achieve far more than grandstanding AGM votes which grab front page headlines. All of which could imply that the ‘shareholder spring’ was a failure by investors to convince executives of their case.

But the way Sadan tells it, it is a line in the sand. And it’s one which he says is already having an effect as executives hit the phones to their cherished investors, eager to make sure they don’t become the new Andrew Moss or Martin Sorrell: “They don’t want to be on that list next year,” Sadan said during a briefing at LGIM’s City headquarters on Wednesday.

And what will fund houses be telling those bosses that deign to call? Well it’s a well worn story of better alignment of interests and simplified, open schemes for top level pay, skewed to medium and long-term performance. The Kay Review echoed their sentiments pretty well.

Sadan has also argued executives should own a “meaningful” amount of shares in their company. And back in July, Fidelity’s Dominic Rossi called for a lock-in on shares paid to executives, preventing bosses from cashing them in for at least five years. He also floated the idea of executives receiving some of their pay in the form of ‘career’ shares which they must hold until they leave the company. Finnish central bank governor Erkki Liikanen, meanwhile, has proposed that bank bonuses be partly paid in bonds. In short, a lot of it boils down to getting more ‘skin in the game’ from executives.

Now looks like a pretty good moment to get some of these ideas for long-termist remuneration schemes to stick. And maybe it is players like LGIM and BlackRock which can best hammer home the advantage.

These hulking giants of the buyside are heavily skewed to index funds. They have a finger in every pie and none hovering over the ‘Sell’ button. They can browbeat boards over years (Sadan rather proudly calls himself ‘Chief Nagger’) and have one defining governance goal: to lift all boats on the same tide.

But the moment won’t hang around for ever, and that’s why Sadan says “We’ve got to get the schemes in place now.” The idea being that when the good times roll once more, exuberant bosses will find themselves tugged back into line by a leash put in place while the mood was far more glum.

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