Should asset managers be acting on CEO pay?

A look at the role institutional shareholders can play.

Not just in South Africa, but around the world, executive pay is under heavy scrutiny. A number of recent studies have called into question the rate at which pay for top executives is increasing.

An analysis by Moneyweb earlier this year also found that shareholders of a number of the JSE’s top 100 companies are starting to express their dissatisfaction with some executive pay structures. They are voting in noticeable numbers against certain policies presented at AGMs.

Even though these votes are currently non-binding and only considered ‘advisory’, the fact that shareholders are voicing their discontent is significant. This is because questions have been asked for some time about whether asset managers and other large institutional investors have paid enough attention to executive pay, and whether they have simply been rubber-stamping whatever is presented to shareholders. There is a feeling that they could, and should, be playing a more active oversight role.

As the chief investment officer for listed investments at Mergence Brad Preston explains, executive pay is a complex and emotive question. One can’t therefore simply say that, across the board, it’s something asset managers should be fighting against.

“We’ve tried to shy away from making blanket statements like it is a problem or it isn’t a problem, because I think it’s much more nuanced than that,” says Preston. “There are a number of different issues within it and there are a lot of company-specific issues as well.”

There are also inherent conflicts in the relationship between management and institutional shareholders.

“The reality is that it’s not comfortable for an analyst or portfolio manager who wants to have a good relationship with a management team to fight with them about what their salaries are,” Preston explains. “That is not an easy discussion. So asset managers are not naturally incentivised to be too aggressive on these things.”

However, he argues that this is something that needs to be managed. Asset managers do need to recognise the role they should be playing and not be afraid to play it.

Fair and responsible

Critically, this means being willing to scrutinise remuneration policies and engaging with company boards when there are issues.

“The main work we’ve tried to do is to say: are the policies that are in place demanding enough? And is management aligned with shareholders?” Preston explains. “It’s not so much for us to say that a certain level is incorrect, but rather get involved in the process and where there is generous remuneration make sure that it is based off a good policy.”

Rob Lewenson, head of ESG engagement at the Old Mutual Investment Group (OMIG), explains that these policies have to meet two criteria.

“Is it fair, and is it responsible?” Lewenson says. “These are two different concepts. To be fair, it needs to be impartially determined, free from self-interest, free from favouritism, and rational. And to be reasonable, it must be approved by independent bodies that have oversight, and it must support long-term value creation.”

These are the issues that asset managers are discussing with boards, and both Preston and Lewenson note that in many cases these engagements are positive. Where they have pointed out misalignments between the incentives offered to executives and the interests of shareholders, changes are often made.

Binding vote

However, there are still cases where representations made to company boards are simply ignored. Even when large numbers of shareholders vote against remuneration policies, they aren’t changed.

This is why there has been a push towards making these votes at AGMs binding.

“We have long been of the position that a binding vote is part of the way that shareholders can ensure fair and responsible remuneration,” Lewenson explains. “King IV has taken the matter forward in terms of requiring that companies engage with shareholders when they receive a material vote against remuneration policies, but unless companies are willing to transform their thinking what other mechanism do shareholders have? Where we see a misalignment is between shareholder interests and an award which is paid out for achieving very little in terms of long-term value creation, how else do we hold those companies to account?”

Preston says that a binding vote may not be a ‘silver bullet’, but it can be a powerful tool.

“Ideally you want management teams to be incentivised to engage with shareholders,” says Preston. “A binding vote incentivises that more.”

The vital issue is really that boards should not have free reign to produce policies free from scrutiny. That means that they should value the input of shareholders, rather than be wary of it.

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