Some companies are clearly frustrated with shareholder input after pay resolutions fail to pass.
This column was first published in Business Day.
What is better: a company that makes a R200m profit with a CEO who earns R10m, or a company that makes a R1bn profit with a CEO who earns R100m?
If you are a shareholder, the obvious answer is the latter. That company delivers far better returns. The fact that the CEO earns 10 times that of the former company is irrelevant. Of course, there may be other considerations, such as wider inequality, that high executive pay may contribute to, but for a shareholder looking to maximise returns, highly paid CEOs are perfectly fine if they generate the profits.
But something odd is happening between shareholders and companies when it comes to remuneration, at least among listed companies. Since June 2017, JSE listings rules have required companies to put their remuneration policies and implementation reports to a non-binding advisory vote at their annual general meetings (AGMs). If these advisory resolutions do not obtain at least 75% support, then companies are required to engage with shareholders about their policies and implementation.
For the first few years, it was rare for shareholders to vote down management on these resolutions. But that has changed.
I sampled 80 listed companies that have reported AGM results so far in 2021. Of these, 26, or 33%, failed to achieve the 75% margin on the remuneration policy or implementation votes. This strikes me as an astoundingly high number. The lowest positive vote outcome was Steinhoff, which had just 7% of votes in favour, but larger, less controversial companies like Old Mutual (54%) and Capitec (49%) also failed to obtain ringing endorsements from shareholders. This was true across company sizes and sectors.
There are two reasons for this swing in sentiment. One is that the country’s largest shareholder, the Public Investment Corporation, has become more aggressive with companies on their remuneration policies and practices. The other is that shareholder proxy advisers have become more influential in guiding the votes, particularly of foreign shareholders. Between them, and other active domestic institutions, the 25% threshold can be breached quite easily.
Proxy advisers and institutions like the PIC tend to parse remuneration policies against a checklist of good practices. One of these is that there should be minimal discretion afforded to boards and their remuneration committees — the policy should be clear and implemented based on performance.
Discretion has become a major issue during Covid, when many companies saw their share prices and earnings slump, resulting in long-term incentives failing to vest. On the one hand, shareholders can justifiably say that management teams should be sharing their pain. On the other hand, a company must find a way of keeping talent on board. Consider retailer Clicks, whose CEO Vikesh Ramsunder resigned last week to take the top job of an Australian-listed company. It is fair to say that Clicks’ incentive structures failed to retain him, though I doubt that is what shareholders were concerned about when only 72% of them endorsed Clicks’ remuneration policy.
Other criteria are less straightforward, such as that long-term incentives should not be tied to the individual performance of the employee, but only to group performance. I can understand the logic of aligning incentives of senior management, who have the authority to influence overall performance, with shareholders, but how should companies retain scarce talent outside the executive committee level? You can easily imagine situations where a company wants to grant long-term incentives to highly sought-after professional employees, with vesting based on their personal long-term performance.
Some companies are clearly frustrated with shareholder input. The engagements by those who fall below the 75% level can range from a conference call to detailed meetings with each shareholder. But this doesn’t seem to work very well. Chemicals company AECI cancelled a shareholder engagement call after none of the 33% of shareholders who voted against its remuneration implementation report accepted the invitation to engage.
Perhaps the most astounding note of frustration was from The Foschini Group, which protested after receiving only 64% support on the remuneration policy and 56% on its implementation that it had “held multiple separate formal engagements with our largest shareholders … specifically established to proactively discuss, upfront, all key features presented in the remuneration report and to elicit their guidance and input into the design of all proposed significant changes … none of these engagements highlighted areas of disagreement, that weren’t adequately addressed”.
Shareholders do need to apply clear guidance to companies on the bar they expect them to meet, which should reflect how remuneration plays into the delivery of their investment objectives. Companies must ensure they do meet those shareholder expectations as a basic principle of good governance. But they can only do that if they understand the issues at play.
It is not good enough to follow the advice of a proxy adviser but then provide no input when a company dutifully arrives to discuss its remuneration policies and hear out shareholder concerns. There should be no surprise for companies if their policies fail to get shareholder endorsement.
• Theobald is chair of research-led consulting company Intellidex.