Deferred Shares Report and Voting Trends Survey

Study shows low adoption of deferred share plans

Tom Gosling, Partner, PwC | Executive Fellow, London Business School | Steering Committee Member, Purposeful Company Taskforce has written a good report on executive incentives, arguing the case for deferred shares (i.e. long term share plans with no performance conditions, except in extreme conditions). It is well worth reading.

Here’s the summary findings report: https://lnkd.in/d9_B8cm and the key points are below.

A quarter of the UK’s biggest companies are failing to adopt the right remuneration polices to reward executive performance, according to a new study by The Purposeful Company, a management think tank.

The research, which looked at the benefits of adopting deferred share plans, found that at least 25% of British companies should be using schemes in order to pay fairer executive bonuses – rather than sticking to the more popular but controversial Long-Term Incentive Plans (LTIPs).

According to the paper, fewer than 5% of FTSE-350 firms have adopted deferred shares in place of a LTIP.

The major study, based on interviews with over 100 companies, investors, remuneration consultants and proxy advisers, showed widespread support amongst investors and companies for greater adoption of deferred share models.

The study revealed a massive 79% of investors and 73% of companies surveyed believe deferred shares are the best approach in certain companies and industries.

The respondents named greater simplicity and transparency as the key benefits of deferred share awards.

Nearly two-thirds (66%) of investors said changing to deferred shares would encourage executives to make decisions in the long-term interests of the business, while over half (52%) believed it would enable bosses to execute company strategies more effectively as they would not be distracted by LTIP targets.

Companies also highlighted practical benefits of deferred shares such as avoiding boom and bust in LTIP outcomes (49%) and the difficulties of long-term target setting (49%).

I have four concerns:

1. There is inadequate consideration on CEO shareholdings in the report. Large holdings of shares are the first thing to consider when setting CEO pay as this creates long term alignment. I wrote about the successful plan at 3i recently and highlighted this issue, see https://www.sharesoc.org/blog/remuneration/3i-well-managed-and-well-incentivised/
2. The report barely mentions remuneration levels and argues a 50% swap is not enough, i.e. swap of 50% of salary of restricted shares is not enough in exchange for 100% salary of LTIP. I think 50% is way too high as it fails to discount for risk. 30% to 40% would be a better swap number. Remuneration creep needs to be reversed. CEO remuneration has tripled over the last 20 years, while over the same period the FTSE 100 share index has barely increased at all. Remuneration creep occurs in a number of ways and each of these should be identified and exposed. The FTSE 100 CEO pay policy model is also too high, with bonuses in many cases at 200% of salary and LTIPs at 300% of salary. These percentages should be less than half current levels. See https://www.sharesoc.org/wp-content/uploads/2016/05/ShareSoc-Remuneration-Guidelines-Large-companies-2016.06.07-.pdf for more detail.
3. Share options may be the right approach for growth companies and in particular for many Small Cap and AIM companies. See https://www.sharesoc.org/wp-content/uploads/2018/07/ShareSoc-Remuneration-Guidelines-Smaller-Companies-2018.07.06.pdf for a good analysis of why share options are sometimes a good idea.
4. I wonder if PwC are trying to make this more complicated than it really is? Tom Gosling and PwC are consultants and generate large fees from remuneration work, e.g. £4million from Thomas Cook where it was also the auditor! See https://www.standard.co.uk/business/pwc-grilled-by-mps-over-its-dual-role-at-failed-thomas-cook-a4267711.html

VOTING TRENDS – 2019 MINERVA SURVEY

This year, 68 of the top 350 companies recorded shareholder dissent of 20% or more relating to at least one proposal. In total, 126 resolutions received 20% or more votes against and abstentions. In 2018, 82 companies and 148 resolutions received high dissent levels, Minerva found.

The 20% threshold, according to the UK Corporate Governance Code’s recommendations, should be considered as significant dissent, with boards required to report to shareholders any actions taken to address their concerns.

However, Minerva Analytics has questioned whether 20% is an appropriate level to judge shareholder discontent. Abstentions are often not taken into account when counting up votes, meaning any investors wishing to show a figurative ‘yellow card’ to a company’s board are not considered in the published results.

Minerva has argued that a 10% level of voter dissent should be seen as “representing something that boards and investors should look at closely”, as it could indicate unresolved differences of opinion on important policies that require attention. This level is used in countries such as France, although there are often restrictions on the type of shareholders that can qualify for this level.

The Investment Association, the trade body for the UK’s £7.7trn asset management industry, has been tracking shareholder dissent via its public register since 2017. The register lists any company resolution that has received 20% or more of votes against (abstentions are shown separately). It includes details of the resolution, voting results and links to subsequent board statements and actions.

Of the 68 companies that recorded significant dissent in 2019, almost half were ‘repeat offenders’ that had also experienced high levels of voter dissent in 2018. In addition, of the 254 companies that received dissent of 20% or more on at least one resolution in the past six years, just over half also received high levels of dissent in at least one other year.

Three companies received significant dissent against at least one resolution in each of the last six years: Investec plc, Millennium & Copthorne Hotels plc and Telecom plus plc.

These figures indicated a breakdown in engagement between companies and investors, and a failure by boards to effectively address shareholder concerns, according to Minerva.

“Either companies aren’t listening to feedback, or shareholders are not explaining effectively, or possibly a mixture of both,” the company said in its report.

Minerva also argued that the traditional six-week AGM season for companies with a 31 December reporting year end did not help shareholders or boards as it did not allow enough time to effectively engage and articulate concerns.

Across seven categories of resolution – audit, board, capital, corporate actions, remuneration, shareholder rights and sustainability – board and remuneration resolutions were the two largest sources of shareholder dissent. This year, 41.27% of resolutions that attracted high levels of dissent were related to board appointments, while 32.54% were related to remuneration reports or policies.

Remuneration resolutions recorded an average of 7.43% dissenting votes in 2019, according to Minerva’s data. This is higher than 2018 (7.10%); it has remained above 7% since 2016. Strict rules around pay disclosure mean such issues often attract a great deal of media attention, which in turn can influence shareholder voting.

In contrast to these high levels of dissent, an average 1.12% of shareholders voted against or abstained on audit related resolutions, the lowest figure across the seven categories. This figure has fallen steadily since 2014, according Minerva’s data. Audit has hit the headlines of late following a series of corporate collapses including Carillion, Interserve, Patisserie Valerie and Thomas Cook.

Minerva Briefing on 2019 Voting Review is available to download free.

Cliff Weight, Director of ShareSoc