30 October 2017

The IA Public Register of low votes is a better idea than the alternatives

Investment Association launches Public Register of low votes

The Investment Association last week wrote to companies that had received a vote against of more than 20% against any AGM resolution in 2017, announcing the launch of a Public Register of companies receiving such votes. To be launched before the end of 2017, the letter describes the register as follows:

The Investment Association initially suggested the creation of such a register (in its response to the Green Paper consultation) to provide appropriate focus on those companies who receive a high vote against or withdraw a resolution, and transparency in how those shareholder concerns, have been understood and addressed by the company.

The Public Register will contain the following public information:

• key details about the resolution in question (resolution title, meeting date etc.);

• the results of the shareholder vote (percentage of votes cast for and against, number of votes withheld and percentage of the issued share capital voted);

• a link to the AGM results announcement including any initial statement made by the Board in response to the significant vote against at the time of the meeting as required under provision E.2.2. of the Corporate Governance Code; and

• a link to any further announcement(s) the company has made in response to the dissent, including the views received from shareholders and what the company has done or proposes to do in response.

Those wanting radical action on executive pay will cite this as a cop-out by a Government that had committed, in its 2017 Election Manifesto, to “legislate to make executive pay subject to strict annual votes”, commonly interpreted as meaning a binding vote on pay outcomes. They will complain that the Public Register will amount to little more than putting companies on the naughty step.

As part of my work on the Steering Group of the Purposeful Company Taskforce, we looked in detail at different potential voting regimes. The analysis and recommendations can be found in Chapter 4 of the Executive Remuneration Report we published in February 2017. We found that the current system was largely effective. Of those companies receiving 20% or more vote against a remuneration resolution in a given year, three quarters increased their support to an average of 94% a year later. The feedback loop largely works, with most companies responding to, and completely resolving, shareholder concerns within the year. 

However, we did find a small minority of 2% to 3% of companies that either lost the vote or faced more than 20% vote against for two or more years in a row. At the time we wrote the report, moves towards a binding vote - already signalled by the Prime Minister - felt inexorable.  We felt that any move to a binding regime should be focussed on those companies receiving low levels of support rather than applying across the board, and so we recommended an escalation mechanism with binding votes only applying to companies that had received a high level of opposition (which we identified as being 25%) two years in a row. 

We concluded: 

“...some development of the existing regime, with impact focussed on this small number of companies, may be appropriate. Given the recent willingness of shareholders to use their own escalation mechanisms (for example voting against the Chair of the Remuneration Committee where remuneration votes are consistently low) it may be that any formal change to the voting regime could be deferred for a further period of two to three years, as practice develops." 

In the end the General Election result did the job for us, and formal changes to the voting regime have indeed been deferred. This is a good thing because a binding vote on pay outcomes would have been very problematic. It was unclear exactly what the vote would be on and what the remedy would be; a binding vote would take shareholders into a realm of detailed decision making that would blur the boundary of appropriate board accountability versus shareholder oversight; and it would have brought a number of unintended consequences, such as investors being less willing to cast a vote against a binding resolution on pay outcomes given the potential severe consequences for management stability. 

By contrast, the proposed Public Register is unlikely to be harmful and could have benefits. It will increase focus on companies that consistently fail to secure high levels of shareholder support on what is a signature issue for trust in business. It will give remuneration committees pause for thought to check that an action that is opposed by a significant minority of investors is indeed in the best interests of the company. And it will help shareholders hold "repeat offenders" to account through escalation mechanisms such as voting against directors. Yet the direct consequences of appearing on the Public Register are not too severe, which lessens the risk that companies might be put off productive innovation in remuneration arrangements through fear of a one-off voting result driven by an adverse proxy-agency recommendations. 

There's a strong argument that no change at all was necessary in the area of shareholder votes on pay - the current regime has been shown to be largely effective in allowing shareholders to exert their influence. But given the Prime Minister's statements, something had to happen. The Public Register represents the best of British Corporate Governance: a proportionate, pragmatic, incremental, and, most likely, effective compromise to nudge behaviour in the right direction. 

And it is certainly better than what we might have had.