Now is the winter of our [shareholder] discontent
Made glorious summer by this [non-binding] vote
If ever a shareholder vote was “historic” – not our words but the Financial Times’ – it was last week’s 59% vote against the remuneration report at BP.
Admittedly it was a non-binding vote but very rarely have investors in a major UK plc expressed such dissatisfaction with executive pay. The last time they did so was in 2012’s so-called ‘shareholder spring’.
For one thing, it would appear to demonstrate that big investors are more in tune with the person in the street that is concerned about fat cat pay than the apparently deaf BP board.
Sifting through voting records, RI has only been able so far to find one leading institutional investor that voted FOR the remuneration report. More on that later.
Voting against the pay report were a swathe of domestic fund firms such as Legal & General Investment Management, Royal London Asset Management and Aberdeen AM who made their case variously ahead of the vote. RI understands that the attack was not coordinated, which was borne out by the shock of the voting result, which provoked gasps of surprise at the meeting. But the pay report had been opposed by ISS and Glass Lewis. Even the business lobby group the Institute of Directors was against it.
Non-domestic investors also came out against the pay award, the likes of CalSTRS (which, somewhat unnoticed, also voted against Chairman Carl-Henric Svanberg) and the Florida State Board of Administration as well as Canada’s Ontario Teachers fund and the Canada Pension Plan Investment Board and so on. US SRI firm Trillium argued that Dudley’s total compensation is greater than the median of its direct peers and that his total compensation is “greater than 150 times national median household income”. The OTPP spoke of a “lack of alignment” between pay and performance.
PGGM perhaps put it best, explicitly pointing out the discrepancy between BP’s record $6.5bn annual loss and executive directors receiving maximum bonuses for the year, the highest bonus payouts since 2008. The Dutch giant also highlighted that the “downwards discretion to recognise the challenging oil price” only impacted below Board-level senior managers. “Directors do not have to hit all targets to receive a maximum bonus, while less senior managers need to achieve performance at maximum under all measures for a maximum payout under the portion of their bonus based on the Group scorecard.”
This was the first AGM since last year’s ‘Aiming for A’ climate resilience resolution at BP and its rivals, filed by a range of shareholders. The board’s endorsement of Aiming for A seemed to herald a new era of responsiveness to investors’ concerns. It was to usher in a less confrontational relationship, with BP and investors ‘on the same wavelength’. Last week’s events clearly undermine that new entente cordiale.
As RI argued at the time, BP needed all the help it could get from investors. That must be even truer now given the collapse in oil prices and an industry that faces an uncertain future.
Amid all of this, one leading investor did support the pay report: Norges Bank Investment Management.
“After careful consideration we voted in favour of the resolution. As a long-term investor it is important for us to be predictable in our voting,” Norges told Responsible Investor.
“The 2015 remuneration is within the binding remuneration policy approved with a majority vote of more than 90% in 2014. We voted for the policy resolution in 2014.“We are however questioning the complexity of the remuneration scheme and the role and use of discretion by the remuneration committee. As a long-term investor it is important for us to address the company’s approach to remuneration. We have addressed some concern related to the company’s remuneration and will continue to follow up through direct involvement.”
There have been calls for BP’s pay committee chair, Professor Dame Ann Dowling, to quit and it is strange indeed that the board didn’t see the controversy coming. Observers had expected perhaps a 25% vote against pay – still serious but manageable. But given it is one of the most engaged companies, you must wonder if investor concerns were getting through. A NO vote is often the final act of engagement when all else fails. The nuclear option, getting out of the stock, may be a step too far though. There’s no reason to think Dowling wasn’t relaying what she was hearing from shareholders back to the board.
Dowling is president of the Royal Academy of Engineering and a distinguished figure in her own right, being a recipient of the Order of Merit (given to figures of the stature of Florence Nightingale, TS Eliot, Winston Churchill etc). She only started chairing the remuneration committee last year and sources have said she brought a different tone to that of her predecessor Antony Burgmans, the ex-Unilever chair.
But this leading academic clearly struggled at the AGM. It’s reminiscent of Alison Carnwath, who left her role as remuneration committee chair at Barclays in 2012 following a similarly bitter pay row. It later emerged, and amid a parliamentary enquiry, that Carnwath was the only director to oppose then CEO Bob Diamond’s pay.
During the year, according to BP’s annual report, Dowling met with a number of the larger shareholders and those who advise them. It said: “These have been constructive meetings and they will be built on in the current year, to aid the preparation of a revised remuneration policy for the chairman and the executive directors to be presented to shareholders at the AGM in 2017.” Some involved in engaging with BP have told RI it would be premature for Dowling to resign.
So, BP would have known the investor mood ahead of the AGM and it would definitely have known the vote was non-binding. Crucially though, investors also knew it was non-binding. The key test will be when they have to vote on a binding remuneration resolution in a year’s time. Bear in mind that the current policy went through with 96% support in 2014 and no one is suggesting Dudley’s award contravenes this policy. Investors should be asking themselves whether they would have approved that policy knowing what they know now, given BP’s changed circumstances.
BP will have to work with its investors if it doesn’t want to enter the uncharted waters of losing a binding vote on pay.
As Chairman Carl-Henric Svanberg said: “We were disappointed that the advisory vote for this year’s remuneration report was not carried. We have already spoken to a number of shareholders and have a continuing dialogue. They are seeking changes to our remuneration policy for the future. We will continue that engagement and will bring a revised policy to our next AGM in 2017.”
Post-BP, there’s a raft of potentially contentious AGMs on the agenda including HSBC, Schroders, Anglo American, Reckitt Benckiser and Aviva in May and WPP in June. Royal Dutch Shell holds its AGM in The Hague on May 24. What are the chances of the shareholder spring blossoming into summer?
And what’s next for BP? The scrutiny won’t let up: it releases its first-quarter results next week.