The days of huge pay packages for CEOs running big global businesses are under threat from leading shareholders, who some think are beginning their own version of the Arab Spring.
On Tuesday, the boss of U.K.-listed insurer Aviva resigned after shareholders rejected his pay deal. Andrew Moss resigned and still got a golden goodbye, and a number of other bosses have come under pressure at global giants like AstraZeneca [AZN], WPP, and Rio Tinto [RIO].
“After a decade during which executive pay spiraled higher and higher, the patience of the people who actually own the world’s largest companies — the shareholders — looks finally to have snapped,” said Lynn.”The weapons might be proxy forms rather than Molotov cocktails, and the rebellions might be staged in hotel conference rooms rather than on the streets. But there is still a whiff of insurrection in the air,” said Matthew Lynn of Strategy Economics in a research report on Wednesday.
CEOs who have yet to feel the force of this new shareholder activism say it is all about performance, but are no longer claiming pay has to be competitive at a global level.
“In the end we have to remember we run this company on behalf of the shareholders that own them. It is very important that shareholders are listened to. On remuneration, what I believe is, it has to be linked to performance,” said Thiam in an exclusive interview with CNBC on Wednesday.
“We’re always mindful in terms that we have a very good dialogue with our shareholders. Ultimately at the end of the day we’re going to be judged by our performance and we’ve got to ensure that our business performs,” said Peter Long, the CEO of Tui Travel, in an interview on CNBC on Tuesday.
The boss of U.K. technology firm Sage Group says his targets are about sales and profits, not his company’s stock.
“I laid out my priorities to our shareholders at the end of 2010, and I put growing our revenue and improving our margins as my top priorities. They’ve agreed with my priorities; they didn’t say, ‘No, no, no, we want you to get your share price up,’ ” said Guy Berruyer told CNBC on Wednesday.
The boss of German-listed Henkel believes agreement between company boards and shareholders is needed.
“The governance model around how you actually decide upon executive income has to come to a resolution — that hasn’t come to resolution at this stage,” said Kasper Rorsted as his firm announced first-quarter earnings.
Whatever that resolution looks like, greater shareholder activism will be good for stocks and the wider economy, according to Lynn of Strategy Economics.
“The Davos set — the people who run the FTSE, the DAX, or the Nasdaq — are seeing huge protest votes against their lavish pay packages. A few have even been forced to step down, and it is a fair bet that many more will follow,” he said. “That is going to have a big impact on the markets — and in time on the economy as well. Like how? It will lead to an increase in dividends, a higher rate of investment, and may well lead to stronger stock market returns.”
He added: “There aren’t many reasons to feel positive about equities right now — but the rebellion against outrageous executive pay is one of them.”
Lynn believes the issue is global. “In the U.S., shareholders defeated the proposed $15 million pay package for Citigroup [C] boss Vikram Pandit. And in Switzerland — hardly a place anyone thinks of as a hotbed for radicalism — a third of shareholders voted against the pay packages proposed for Credit Suisse’s [CS] top executives,” he said.
The ‘Pay Racket’
Lynn says there is a lot for investors to be upset about following years of ever-bigger remuneration deals.
“Executive pay has become a racket, where the bosses of quoted companies constantly award themselves more and more money, while the shareholders see little increase in the value of their stock,” he said.
“If you look at the whole decade from 2000-2010, the pay of the chief executives of the 350 largest quoted companies went up by 108 per cent, according to a recent study by the consultants IDS. And the value of those companies over the same period? It went up by just 8 per cent,” said Lynn, who says the comparison generally gets worse as the companies get bigger.
“Much the same is true in most countries. The returns to being a CEO have soared, while the returns to being a shareholder have stagnated. In real terms, they have actually got poorer,” he said. “That is hardly fair on the people who actually own these businesses.”
If more investors begin to protest, Lynn expects three big changes and believes it could be good news for shareholders and the wider economy.
“CEOs are going to pay a lot more attention to their shareholders. In the last decade, they paid a lot of lip-service to serving shareholders, but there was no substance to it. They could treat them with contempt and assume it didn’t matter. After all, shareholders never actually did anything” about it, said Lynn, who expects dividends to rise. In turn, share prices will rise, he added.
There will also be more investment, according to Lynn.
“CEOs will be paid far more modestly and will only be rewarded for genuinely improving the business they are running,” he said. In effect, Lynn added, that means they will have to focus more on slowly and patiently building market share — and you can only do that through investment.
“Lastly, we may well see higher stock markets,” Lynn concluded. “It can hardly be a coincidence that as CEO pay has soared, stocks have stagnated. Companies became vehicles for enriching their senior staff, rather than their investors — with banks as the most extreme example, but with many others guilty of precisely the same thing.”
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