Exxon and HSBC: hollow victories on pay and governance

Why important AGMs this week at ExxonMobil and HSBC will end up asking more questions than answers.

Two of the most important battles in corporate governance will be played out to a larger than usual audience this week. The publicity could be seen as a victory of sorts for supporters of shareholder responsibility and greater public scrutiny as the most potent vetoes against corporate profligacy using other people’s money. Unfortunately both spectacles look like being rather hollow. First up is today’s ExxonMobil’s AGM on (Wednesday May 28th) where shareholders including corporate governance campaigner Bob Monks and the Rockefeller family – scions of John D. Rockefeller, founder of Standard Oil, Exxon’s forerunner – will prolong a seemingly never-ending quest to persuade the US oil giant to split the role of chairman and chief executive. They argue that dividing Exxon chairman and CEO Rex Tillerson’s role would bring better governance oversight, notably in encouraging the company to adopt more enlightened policies on sustainability. Ethical arguments aside, they also argue that Exxon is failing to position itself for peak oil scenarios and the increasing prospect of renewable energy markets. Significantly, the vote is being hailed as a harbinger of split chairman/chief exec rules in the US to follow what is considered as best governance practice in European markets. The resolution, supported by corporate governance proxy voting agencies, including RiskMetrics Group, the influential US group, looks like topping the 40% it got last year and may even clear the50% level. Some of Europe’s largest institutional investors have publicly backed it, including F&C Asset Management, the Cooperative Insurance Society, Morley Fund Management and the West Midlands Pension Fund. Nonetheless, should it pass, Exxon will probably start ‘ignoring the shareholder vote seriously’, as Bob Monks has joked in these pages, because of the non-binding nature of the ballot. Exxon has consistently funded lobby groups to rubbish climate change research. It is unlikely to change its tune now, particularly while oil prices boom, rendering more environmentally unfriendly oil extraction such as tar sands in Canada and Nigeria commercially viable. It is also questionable whether the chairman/CEO split debate is really that important. After all, how divided are chairman and chief executive really likely to be on corporate policy?
At a recent corporate governance conference in Paris, Jay Eisenhofer, founder and managing partner of Grant & Eisenhofer, the US securities class action firm, made the point that it is much more important to know the calibre and independence of the entire board. Another panellist suggested all directors should undergo a recruitment interview by investors, pointing out that the information shareholders were relying on at the moment amounted to little more than a ‘corporate-created CV’ for their most important representatives. Both proposals make sense. The week’s second governance ding-dong will come
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.