The institutional investor community is bracing for a key speech by UK Business Secretary Vince Cable next week at which he is set to unveil his long-awaited proposals on executive pay.
Cable is set to deliver his ideas at the Social Market Foundation think tank on Tuesday.
“Excessive pay is a symptom of serious market failure, with short-term investment cycles exacerbating shareholder disengagement, and closed networks of directors on remuneration committees contributing to the rapid growth of top pay,” runs the blurb for the eagerly anticipated event.
Various proposals have been floated by the coalition government in the past few weeks. Prime Minister David Cameron said he was minded to introduce a binding shareholder vote on remuneration.
It is understood that a group of leading investors met with the government this week to explain that this would not be workable in practice and could prove counterproductive.
But at least one major player has come out in support of forcing companies to respond to shareholder votes on pay. Fidelity has entered the debate with a very public three-point proposal.
In a letter in the Financial Times, the US-based firm has called for corporate boards to be required to seek shareholder approval for annual variable compensationfor directors before payment. If the resolution fails to get 75% shareholder backing, Fidelity suggests, it would be deemed to have failed and the board would be required to seek a new resolution.
And if the board again fails to get 75% backing, the remuneration committee chairman should be required to step down. The proposal comes from Dominic Rossi, Chief Investment Officer, Equities at Fidelity Worldwide Investment, which is not a signatory to the United Nations Principles for Responsible Investment.
Rossi said “inappropriate” levels of executive reward have destroyed public trust. “Change is required to restore public confidence and to address what has become a major distraction for management and companies,” Rossi says. The government told Responsible Investor this week that “all options” are on the table.
“If foreign investors choose not to vote on executive remuneration packages, the UK government is hardly in a position to impose sanctions,” said Prem Sikka, Professor of Accounting at the University of Essex.
Sikka, who argues that banks and company employees should have the right to vote on executive pay and appoint directors, says: “Shareholder empowerment is unlikely to solve the problem of excessive executive pay.”