A £23m pay deal for the chief executive of Reckitt Benckiser will come into focus this week when the Dettol-to-Durex maker puts its remuneration plans to the vote at its annual general meeting. Rakesh Kapoor’s package – twice what he received the year before – has been described by one shareholder as a misjudgment of the mood of investors, who have marked 2016 as the year they are prepared to say no to exorbitant pay deals.
Boardroom bosses will be trying to gauge whether the revolts, which got this year’s season off to a blistering start, can be maintained. With BP and Smith & Nephew still reeling from No votes at the start of April, Shire Pharmaceuticals and fellow FTSE 100 member CRH were last week rebuked by investors, while in the FTSE 250, engineering firm Weir had to abandon plans to issue shares to its directors after a resounding protest.
“This AGM season is shaping up to be the most raucous on record,” said Simon Walker, director general of the Institute of Directors. “I welcome the fact that shareholders are finding their voice.”
The mood appears to be hardening even compared with the so-called shareholder spring of 2012, which delivered boardrooms their first jolt since May 2003 – when GlaxoSmith-Kline’s £22m deal for then chief Jean-Pierre Garnier was rejected.
That was the first time shareholders had had a direct vote on pay. In 2013 the system changed, with the advisory vote on remuneration reports covering that year’s pay now supplemented by a second vote on remuneration policy for the upcoming three years. Crucially, that vote is binding.
Walker said: “Investors are still getting used to their new binding vote, and have seemed cautious about using it so far, perhaps waiting to see whether boards pre-emptively addressed concerns on executive pay. It is vital that boards do this. The binding vote has not yet had the desired effect and shareholders are making their displeasure clear.”
The annual meeting season continues this week. On Thursday, Reckitt will ask investors to vote on its pay report and new remuneration policy, which reduces the maximum number of shares that can be awarded to Kapoor but still means he can get multiples of his salary in shares. The company hopes to head off a revolt by emphasising its performance – its stock market value is up £21bn in three years.
Other companies holding AGMs include Standard Chartered, Royal Bank of Scotland, Glaxo and Aviva, whose chief executive, Andrew Moss, was forced out in the 2012 revolt.
Investors are also focusing on companies outside the FTSE 100, including Man Group, the hedge fund firm that awarded chief executive Manny Roman a 10% salary rise for 2016. Its AGM is on Friday and in its annual report points out that Roman has not had a salary rise for five years, while performance has improved.
In the coming weeks there will also be meetings of Shell and WPP, which announced last Friday that chief executive Sir Martin Sorrell had received £70.4m for 2015.
WPP responded to a revolt by changing its bonus schemes: investors are scrutinising the small print of this year’s deal before deciding how to vote in June. Sorrell has set out his case that he is being paid for performance. Pay revolts are often sparked when this link breaks down. They can also happen when shareholders are caught unawares – as happened last week with Shire’s 25% salary rise for chief executive Flemming Ørnskov.
There also signs that investors are focusing on absolute pay. Stefan Stern of the High Pay Centre is calling for the disclosure of pay ratios – comparing the boss’s reward with average pay in the company – as a way to keep boardrooms in check. The idea was also raised last week by major investor Legal & General. “If public disapproval and shame is what it takes, that sort of disclosure could be helpful,” he said. He pointed out that shareholder action tends to come in waves, and hopes this year’s will have a lasting impact.
Peter Montagnon, a key figure at the Association of British Insurers at the time of the Glaxo revolt who is now at the Institute of Business Ethics, agreed: “It’s possible that this time will be different because of public awareness of inequality, and recognition that the system is pretty well broken.”
A report produced under the auspices of the Investment Association, which has taken on the governance monitoring previously done by the ABI, concluded last month that the current approach to executive pay is “not fit for purpose”.
Montagnon said: “There is a case for root-and-branch reform but all sides would have to agree it needs to change. Some companies like the present system because they feel they can game it. Some shareholders like it because they make a living out of it and prefer to stay in their comfort zone.”
