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04 May 2016

Shareholder Spring?



How much do you need to pay someone to run a large company? Is one million enough? Five million? Ten? Fifty? Does it depend on the type of company? Should it depend on the performance of the company? Anyway, who decides? These are interesting questions, as there seems to be a growing focus on the issue. 

BP have had problems with shareholders over the plan to pay Bob Dudley something in the order of £14 million this year. Parts of the press and media are hailing a “shareholder spring” as shareholder groups make rumbling, grumbling noises about executive remuneration. (As an aside, using the ‘spring’ locution seems a bit negative; it’s based on the “Arab Spring” of a few years ago, which some with more enthusiasm for than knowledge of the Arab world hailed as the silver bullet for Middle Eastern governance. If you look at that now, then the shareholders don’t seem to have much hope of success………)

Rewards of corporate office

But the quibble with nomenclature aside, it is clear that after years of passive acceptance of whatever remuneration committees chose to endorse, people are looking far more closely at the rewards of high corporate office. So let’s just for a moment look at the BP case. We are all aware of the Gulf oil spill and problems that created for the company; profits, share price, reputation - everything was trashed in the wake of the blow-out. But that’s all in the past. The reality of the present is that the share price dropped in the year 2015 by about 13%. The company was loss-making, and it cut five thousand jobs during the year. Mr Dudley’s remuneration, on the other hand, rose by around 20%. Coming to this cold, as it were, I think it legitimate to suggest that one would be surprised by an environment where profitability goes out of the window, jobs are cut, the share price takes a significant fall, and yet the CEO registers a healthy increase in remuneration. Delve into it a bit and you will find that the reasons given are that “he performed strongly in the areas where he had control”. The poor performance, in other words, was down to uncontrollable external factors, in the case, namely, the oil price. Well, that is of course absolutely true; the oil price did drop sharply, and the problems may well be attributable to that. However, let’s just imagine a scene where the oil price soars higher, profits leap and the share price is rampant; does anybody genuinely believe that in those circumstances the remuneration committee might say “ah, but his performance in some areas was not that good, so despite all the financial good news, the CEO isn’t going to get a bonus”? I suggest if you think that, you’re living down the rabbit hole with Alice. This is a case where the CEO is rewarded, regardless of the fate of the company’s other stakeholders. 

Present or future rewards

Now, the oil price will recover, and it may well be that Mr Dudley has indeed done a good job and the company outperforms a recovering market. In that case, you may say, the shareholders will see the benefits. Indeed, in the future they may see benefits; but Mr Dudley, before there is any sign of that, has already been given his reward. He could walk out tomorrow, with a nice fat wallet, while shareholders have to hold on in an uncertain world to see if he was worth the money. Surely that’s not equitable? By all means pay CEOs, but don’t let them jump the queue ahead of the shareholders, in whose interests they are supposedly working. 

Norway's wealth fund

I apologise to Mr Dudley and BP (actually, I’d love to think they read this…) for using them as an example here, but what they’ve done fits that bill. But, on the other hand, if their actions cause behaviour to change  in the face of shareholder discontent, then in fact they will have done us a favour. There are more AGMs coming up where this subject will be raised, and I understand that the Norwegian Sovereign Wealth Fund (whose funds would, on an averaged basis, apparently own 1.3% of all publicly-quoted companies, globally) is flexing its muscles with the intention of trying to put the interests of shareholders ahead of the self-interests of executives. Good luck to them; they’ll have to face the incestuous nature of remuneration committees - by and large, it’s quite a stretch to call them truly independent.

Share price and remuneration

To return to my opening question - how much do you have to pay? Well, the answer to that is subjective. I don’t go along with the current vogue in leftish politics that there should be a maximum ratio of top to bottom salaries - that’s too prescriptive. But I would suggest that there should be a link - a very strong link, in fact - between share price performance and senior executive remuneration; after all, the shareholders own the company and it is their wealth which is at risk. The CEO is an employee, whose responsibility is to maximise the return to the shareholders, and that return is precisely what the share price represents. So following BP’s course is intuitively wrong; by all means reward the CEO for achieving the desired result, but don’t let the remuneration committee get away with putting executive rewards before shareholders. A look at the cross-pollination of boards and remuneration committees is instructive, as well.

So, shareholder spring?

So, time for a shareholder spring? Yes, definitely. Will it happen? Well, there will certainly be a litany of egregious examples appearing but sadly, I’m not convinced; the vested interests have a strongly entrenched position. But all power to the elbow of the Norwegians! 

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