Corbynomics, Director Remuneration and Voting

The media is full of analyses of late of the impact of the new Labour front bench and the policies of the key players such as Shadow Chancellor John McDonnell and Business Secretary Angela Eagle. Mr McDonnell apparently advocates big increases in public spending, higher taxes on the wealthy, cancellation of the independence of the Bank of England and widespread nationalisations of energy companies and the railways.

The Financial Times ran an editorial on 16/9/2015 suggesting that Mr McDonell’s “cavalier disregard of property rights, and for the solvency of pension schemes which hold such shares, is bizarre” and went on to suggest that the European Court of Human Rights (ECHR) would likely block such plans. Although the FT’s Editor rightly pointed out that nationalisation without compensation was created by the precedent of Northern Rock, he argued that the legal challenge to that was not accepted by the ECHR because they accepted the independent valuer’s view. That was not the reason why the legal challenge failed in both the English Supreme Court and the ECHR. It failed because the Supreme Court considered that Parliament had a right to dictate the matter based on their view of the policy necessities, i.e. it was for the wider good, and the court was unwilling to overturn the will of Parliament. The ECHR never actually heard the case or the arguments against nil compensation, but relied on the English Courts as providing the necessary forum and hence there were no grounds to challenge it. Therefore, any view that a future Labour Government could not justify nationalisation without compensation, as the last one did, is mistaken. Any reasonable excuse will suffice, so shareholders and pension fund investors need to bear that in mind.

A New Voting Rule for Company General Meetings?

One of the first acts of the new front bench was to oppose new Government legislation to require a 50% vote of the relevant membership before trade unions could call a strike. Well if you consider that reasonable, would it not also be reasonable to require a 50% turnout of votes at company General Meetings for resolutions to be passed. In other words, company votes should require 50% or 75% of those eligible to vote, not just of those voting!

This thought came to mind after noting the results of two recent AGMs. Auto Trader Group achieved 81% or 82% turnout (i.e. of votes of those on the register) on all resolutions (including Remuneration Policy and Report) which is good, and with no more than 6% votes against any resolutions they would pass my proposed new rule. Even better in one way was Intercede who achieved 100% in favour of all resolutions (i.e. no votes against or withheld which is the first time I have ever seen this). But they only got a turnout of 51% so only just squeaked past my proposed new rule. Bearing in mind past controversies at Intercede on such issues as pay it is surprising they got such a high positive vote on all resolutions, but there is of course no Remuneration Report vote at this company as it is AIM listed and the directors choose not to bother with one.

But in many other companies, where turnouts are low (60% is more common), and there are substantial votes against some resolutions, such a voting rule might have major advantages. It would ensure companies had to get a high percentage of votes FOR resolutions to get them passed, and even more importantly, it would encourage companies to ensure that all investors (including beneficial owners in nominee accounts) actually voted. For example, it would mean the directors had to get specific positive approval for votes on their own pay from ALL shareholders, rather than them having to rely on the support of a few unfocussed institutions using block votes, the apathy of many investors about corporate governance, the complexity of voting defeating many, and the inability of most private investors to vote at all (if they even knew the event was taking place).

Complex Pay Schemes Under Attack

The Investment Association, which represents institutional investment managers, have initiated a review of executive pay schemes aimed at radically simplifying the structure. Daniel Godfrey, CEO of the Association, said “Complex pay structures can make it difficult for investors and the wider community to judge whether high rewards are being earned for exceptional performance or mediocre performance flattered by favourable external factors”. It is undoubtedly true that the prevalence for multi-layered pay structures with cash bonuses, LTIPs, options, generous pensions and other awards making up total remuneration which are now so common have led to a rapidly rising total pay figure for public company directors.

A New Remuneration Initiative by ShareSoc

This initiative of the Investment Association is surely to be applauded. But the ShareSoc board of directors has recently decided to put together our own policy document on remuneration following such cases as that of Vislink. It will attempt to cover both large and small companies, using a principles based approach rather than attempt to lay down detail rules as we recognise that different pay structures may be necessary to meet different circumstances and types of company. But the overall magnitude of remuneration in relation to the size and profits of a company may be of relevance and over-complicated schemes with too much emphasis on performance related elements will no doubt be two particular focuses. We are forming a steering group to develop our policies in this area. If you would like to join it, please contact us via the contact page of our web site – see www.sharesoc.org/contact-us/

Front-bench Experience

Angela Eagle has been appointed Shadow Business Secretary. The London Evening Standard suggested that Chuka Umunna, her predecessor in the role, or even Vince Cable, were “pussycats” in comparison with Eagle. Vince Cable of course had real business experience, as does Sajid Javid the Conservatives Business Secretary – indeed the latter even used to borrow money of his bank manager to buy shares in his early years according to one press report. Ms Eagle read PPE at Oxford and did spend a few months at the CBI (not sure that is real business experience), but otherwise has spent her whole career working for a trade union or being a politician. She also has a reputation for being aggressive and looking back in history, was actually Exchequer Secretary to the Treasury during the Northern Rock nationalisation events – and defended that process vigorously in Parliament while clearly having no sympathy for shareholders in the company.

How the Conservatives Might Respond

How might the Conservatives defend against aggressive left-wing Corbynomics with these characters leading the charge? Well surely one thing they could do is attack the excessive remuneration of public company directors, and undermine the politics of envy, by tackling pay issues more strongly. Vince Cable certainly went part of the way, but more clearly needs to be done. Remuneration committees need reforming and the role of pay consultants diminished. But one simple step might be a new rule which required votes in favour to be 50% of all shareholders (or 75% for special resolutions), as proposed at the start of this article. Now that would really shake things up would it not!

Roger Lawson