Bunzl, BT, Credit Suisse, Drax, United Airlines, G4S, and BlackRock: Executive Pay Still the Order of the Day
Today’s post looks at a subject
that has been the focus for many of the posts in Financial Regulation Matters and that is Executive Pay. In
recognition of the ever-increasing issue of executive pay despite poor
performance, the blog has analysed a number of issues in this field, ranging
from BP
recently cutting the pay packet of its CEO to Credit
Suisse vowing to increase the bonuses it pays to its leading managers.
However, as discussed in a post
dating back to the 9th of February, there is an undercurrent of
unrest amongst shareholders that is slowly but surely beginning to shape the
atmosphere amongst big business. In this post, the focus will be on reviewing the
latest tranche of stories coming from the world of big business in relation to
executive pay and, ultimately, the post will discuss how the trajectory of this
movement to affect the pay packages of some of the leading business figures may continue.
The first firm that will be worth
discussing is Bunzl, the multinational non-food
product distributor that is headquartered in London. The company made headlines
last year because it decided to pay its former CEO, Michael Roney, a full
year’s bonus package despite the fact that he had only worked a proportion
of the year before leaving. In receiving a total package of £3.64 million,
having only worked up until April of 2016, Roney drew the anger of shareholders
as over 26% of the shareholder body voted against the pay package award. In
reaction to the revolt, the company instituted a pro-rata system of pay
packages, which have ultimately been welcomed by shareholders, although recent
news that new CEO Frank van Zanten is to have the maximum bonus he can receive boosted
to 180% of his £800,000 annual salary has prompted another wave of activism.
Shareholder groups ISS and Pirc have stated recently that the remuneration
policy, with regards to van Zanten, is ‘not
without concern’ and is to be considered as ‘excessive’. The coming days
should reveal the reaction to the latest round of activism within Bunzl, but
the company is currently sticking to the oft repeated line of ‘the
remuneration policy is intended to drive and reward performance’. ISS, an
influential proxy advisor, have been busy recently. In addition to criticising
Bunzl, the shareholder advisory service recently criticised the energy giant
Drax regarding its decision to increase
the pay of its CEO, Dorothy Thompson, to £1.6 million, despite the company
recently announcing that shareholder dividends would be facing an overhaul. The
energy company, which is currently experiencing a difficult period owing to the
challenging conditions facing all energy companies, reacted by stating that it
had consulted with the majority of shareholders before initiating the rise, but
in actual fact nearly 23% of shareholders have voted against the hike, which
should see the company backtrack or make the necessary changes to quell the
uprising within its ranks.
In a similar story related to the
reaction to activism from shareholders (and in this case politicians), Credit
Suisse who, as
we know, were adamant that their top bosses would receive an increased pay
package, have recently relented. However, rather than an official response to
the activism, it is actually the bosses themselves have acted to see their
packages reduced in the face of criticism. Tidjane Thiam, along with other top
managers at the bank, have recently agreed to a 40% cut
in their packages after an extraordinarily fierce response to their
proposed $77 million increase, as was discussed previously in Financial Regulation Matters. Thiam, in
writing to the shareholders of the bank, announced that the board had
volunteered for the cut after shareholders has expressed ‘reservations’ about
the increase, ultimately conceding that the recent and massive settlement between
the bank and the US Department of Justice was ‘not
appropriately reflected in the compensation of the current management’
which, in layman’s terms, means the board had been of the opinion that no one
would question why they were being rewarding for being at the helm during one
of the worst periods in the bank’s history. This development is yet another
demonstration of both the power of shareholder activism, and also the
incredible levels of detachment from their actions that some CEOs demonstrate.
Another story, but one that is
ongoing at the time of writing, is the move by customers of the embattled
airline company United Airlines
to limit the pay package of its CEO, Oscar Munoz, by way of a procedure
initiated by United Airlines that sees its CEO’s pay package linked to consumer
satisfaction. In reaction to the video
that recently went viral of a Doctor being forcibly and aggressively removed
from one of their airplanes, customers are reportedly ready to react
negatively in consumer surveys which would see Munoz’s pay package reduced
by $500,000, although this is unlikely to make a dent in Munoz’s reported $14.3
million pay package. However, the negative press is likely to continue for some
time, so there is a likelihood that his pay package may be reduced even
further, particularly if the share prices of the airline continue to fall in
the wake of the PR disaster.
In terms of companies responding to
pressure over executive pay, it is worth ending this section with news that BT,
the massive telecoms company, is reportedly about to claw back some of the £5.4
million earned by its CEO Gavin Patterson last year because of the scandal that
emanated from the ‘inappropriate
management behaviour’ in its Italian division which ultimately wiped over
£8 billion from its market value – essentially, the division had been
overstating its performance for years. As a result, BT’s bosses were being
rewarded for meeting performance measures which were based upon fabrications,
and as such it is now likely that its top bosses will have to pay back some of
their bonuses linked to these performance measures. It is, however, likely that
this will not be the end of the story for the bosses at BT, as the scandal
looks set to further unravel, as is the way with accounting scandals (think of Enron, although that
was on a much bigger scale, of course).
However, not all companies are
reacting to activism regarding the pay packages of their leaders. BlackRock, who
as we have discussed in another
post in Financial Regulation Matters
are now the home of George Osborne, are currently in the news because it
awarded its CEO, Larry Fink, $25.5 million after a number
of job cuts last year and also after it had campaigned against excessive
executive pay. The rise, when understood against the fact that BlackRock’s
revenues and net incomes fell slightly, is in sharp contrast the claims that,
as an institutional investor, it would ‘not
hesitate to exercise our right to vote against incumbent directors or
misaligned executive compensation’, which is a sentiment that its own
shareholders are obviously not inclined to follow. In another story of
executive pay despite poor performance, the CEO of G4S,
the private security firm, received a record
pay package of £4.8 million despite the firm suffering from a wave of
scandals, including people
being sent to prison because of faulty electronic tags, and a Young
Offenders Institute being returned to the Government after a string of child
abuse allegations against G4S staff. Although the company remains in
profit, the incredible string of scandals associated with the firm, under
Ashley Almanza’s tenure, makes the massive award seem almost ludicrous in the
current climate.
Ultimately, the stories that
continue to garner headlines represent a developing sentiment. Yes shareholders
are becoming more active in disputing the pay packages of their managers, but
the coverage of this activism is, unfortunately, not absolute. The stories of
BlackRock, G4S, and the recent decision by ISS to reverse
its criticism of a pay procedure for bosses at Goldman Sachs mean that
shareholders, as a general body, have much more to do to restrain the actions
of their managers. Yet, this is the problem. Ultimately, shareholders of
companies are exactly that, shareholders in that
particular company. They do not, for obvious reasons, represent a unified
body with concerns outside of their own advancement. The sentiment being
developed by the headlines that shareholders represent a positive check on mismanagement
is correct, but potentially misleading. It is misleading because it advances a
mentality that shareholders should be the protectors against mismanagement when,
in reality, it is the state’s responsibility. Shareholders cannot, and arguably
should not, be placed as vanguards for protecting the public because, simply,
that is not their role. The current political climate, which is dominated by
the political ‘Right’, has cultivated this sentiment and we are now seeing the
theoretical support for that movement. This is not to champion the political ‘Left’
– far from it – but there must be a responsibility taken by the state to act in
the interest of the public. In this regard, we must understand these
shareholder-champion headlines from within that framework.
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