Responsible Investor

at HSBC on Friday (May 30th). Anticipatory press coverage so far suggests a billing of investors lining up to give the board a bloody nose over sub-prime and the controversial £120m pay and bonus package proposed for five top directors over the next three years. The Association of British Insurers has issued an “amber” rating to HSBC investors, indicating concerns over the pay report. Pirc, the UK corporate governance adviser, says shareholders should vote against because the bonus proposals are “excessive” at seven-times salary. Shareholders may recall allegations made last year by Knight Vinke, the activist fund manager, that HSBC may have broken UK company law by paying top executives under a less testing bonus-share plan than the one that was voted. The matter of $17.2bn of write-offs in this year’s annual results and two-years of poor share price performance should also focus investor minds. Yet, barring a miracle, shareholders are unlikely to deliver more than a mild rebuke to chairman Stephen Green as they wave through the pay deal – lulled in part by the appeasement of a board reshuffle earlier this year. Surprising? Hardly. The evidence of this season’s US say-on-pay votes suggests investors don’t have the appetite for pay battles. After hundreds of billions of sub-prime write-downs by US banks potentially tipping the US into recession, it makes you wonder when or if they ever will? At Citigroup, JP Morgan Chase, Merrill Lynch and Morgan Stanley, say-on-pay votes this year got an average of just 37% of shareholder support, against 43% last year. One large pension fund chief, told me privately last week that investors were bitterly disappointed with the say-on-pay ‘inertia’ and unsure how to proceed.

Perhaps some investors are still shell-shocked from the sub-prime crisis and market turbulence? Maybe they expect politicians and regulators to step in, particularly in Europe where representatives have again recently slammed ‘monstrous’ excessive executive pay? History suggests they could be waiting for some time. The public appears to be tiring of inflation-busting executive pay rises just as everyone else is being asked to tighten their belts because of the very same spectre of inflation. Governments though are notoriously reluctant to intervene on executive pay, no matter how socially contentious the sums involved. Regulators such as Hector Sants, chief executive of the UK Financial Services Authority, appear to expect shareholders to bite first, believing they will pressure bank executives to bring an end to the madness of bankers paid huge bonuses on the basis of short-term rather than genuinely sustainable long-term numbers. Sadly that’s not happening. An alternative reading is that fund managers are broadly unlikely to take action on board perks unless specifically instructed by their clients. After all, pay and bonus for many fund management houses tends to function within the same parameters. Where, for example, are the regular AGM proposals for option grants and cash bonuses based on multi-year performance or deferred stock? HSBC’s pay plan moves somewhat in this direction, but on breathtakingly generous terms considering what shareholders have recently swallowed. This week’s AGMs at Exxon and HSBC will make good watching and could even throw up the odd interesting plot line. But observers expecting serious governance programming will likely coming away thinking they’ve just seen a repeat episode of a sorry, old show.

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