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Fund Firms Turn Up the Heat on Executive Pay — and It’s Working

Increased scrutiny from fund managers on corporate executive pay packages is starting to shape boardroom behavior, a data review has found.

  • Joe McGrath

Increased scrutiny from fund managers on corporate executive pay packages is starting to shape boardroom behavior, a data review has found.

The decision by six FTSE 350 companies to withdraw their pay proposals between January and July 2017 was the direct result of pressure by fund firms who invest in those companies, according to a trade body for U.K. investment firms.

The Investment Association said on Wednesday that scrutiny of executive pay levels led to the boards of engineering software company Aveva, temporary power specialist Aggreko, defense contractor Chemring, tobacco company Imperial Brands, energy services company Hunting, and self-storage company Safestore withdrawing their original pay resolutions ahead of their respective annual general meetings. All six companies are listed in the FTSE 350, an index comprising the 350 largest companies listed on the London Stock Exchange. The findings come as fund managers globally have been paying closer attention to corporate remuneration packages in recent years.

The trade body’s analysis looked more broadly at the voting behavior of shareholders at 267 FTSE 350 annual general meetings. It found that while FTSE 100 companies had put forward more agreeable pay plans than last year, companies in the larger FTSE 250 notched an increase in shareholder rebellions, which the association describes as votes of more than 20 percent against pay resolutions.

According to the Investment Association’s analysis, the number of pay proposals from FTSE 100 companies that received more than 20 percent dissent fell 35 percent from the previous year, a trend the trade body attributed to these companies having “listened” to shareholders. Meanwhile, there was a 100 percent increase over the previous year in pay proposals from FTSE 250 companies that got the thumbs-down by at least 20 percent of investors.

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In a statement accompanying the findings, U.K. business minister Margot James said that while the largest London-listed companies were showing signs they are listening to shareholders, there was more to be done.

“With an increase in the number of shareholder rebellions at FTSE 250 firms over bosses’ pay packets, we cannot afford to take our eye off the ball,” she said in the statement.

In the U.S., investment managers representing some $20 trillion of capital formed the Investor Stewardship Group in January 2017 to influence boardroom conduct. BlackRock, JP Morgan Asset Management, State Street Global Advisors, and Vanguard are among the signatories to the ISG.

Speaking to Institutional Investor, Glen Booraem, global head of corporate governance at Vanguard, said fund firms are keen to influence remuneration packages because they want to create “the right environment for long term value creation,” adding, “We think it is important for a component of executive compensation to be driven by relative performance. An example is encouraging tighter alignment between the design of compensation programs and relative performance outcomes. Absolute performance is important but we also want companies to be incentivized to outperform their peers.”

A spokesman for Chemring said, “We had been actively engaging with shareholders regarding long-term incentives for some time and, while we received majority support for the proposed revised approach, the board believed that the right course of action was to withdraw the resolutions and consider these plans further.” Aveva and Aggreko did not respond to requests for comment. Imperial Brands and Hunting declined to comment. Safestore referred to an announcement it made after its annual general meeting that it decided to withdraw its proposals after an “extensive consultation process.”