US research firm Equilar found that two-thirds of the S&P 100 disclosed some level of shareholder engagement about executive pay in 2014, compared to only seven companies in 2009. While non-executive directors (NEDs) in the UK have discussed pay with their shareholders since the first lost pay vote at GlaxoSmithKline in 2003, consulting shareholders on pay is clearly a recent phenomenon in the US.
But that is not the only difference.
Further dissimilarities were defined over the course of several conversations with Deborah Gilshan, Head of Sustainable Ownership at UK pension fund RPMI Railpen Investments, and Catherine Jackson, Senior Adviser, Responsible Investment at Dutch pension giant PGGM. Both Gilshan and Jackson have experience with multiple shareholder engagements around the world.
Commenting on the Equilar findings, Jackson said: “It would be interesting to see an assessment of the depth of the conversations and with whom shareholders engaged.” Gilshan added: “We’d like to see quality rather than increased quantity. Are these just information gathering or has there been real engagement that would change practices in line with shareholder views?”
Some of the disclosures that Jackson and Gilshan indicated would be helpful in the US include the depth of engagement with shareholders and the precise results of those meetings and their subsequent effects on pay and corporate governance. Yet there are many companies in the US who have failed Say on Pay very badly and still engagement doesn’t happen. It is merely stated that they have taken the vote under advisement.
For example, a Coca-Cola spokesman confirmed that “Directors are available to engage directly with shareowners and have done so in the past year.” In contrast, at Oracle, where both Gilshan and Jackson have been unsuccessfully attempting to engage with the board, pay discussions do not appear to include shareholders. Despite losing two consecutive pay votes, its latest annual report says: “the Compensation Committee engaged in a series of discussions and deliberations about our compensation philosophy….” These sound like internal discussions, rather external ones.The fundamental difference, explained Jackson, is that it is often challenging to get in front of a NED in the US, while in the UK the boardroom door is much easier to open. In the US, the corporate secretary and management speak for the board, while in the UK boards articulate their own views and NEDs can speak on their own behalf. In the UK, a single phone call is usually enough to arrange a meeting with a NED and the corporate secretary is seen as a conduit to the board. The process is much more arduous in the US and the two have nicknamed it the “journey of persuasion”.
“Management has an appropriate part to play in engagement,” commented Jackson, “but eventually some questions can only be answered by a NED.”
“In the US, a disproportionate amount of time is taken establishing proof of ownership and legitimacy of shareholders,” said Jackson. Added Gilshan: “You have to be tenacious in any market, but, as long term shareholders, engagement with NEDs is fundamental to board accountability. That’s why it’s worth the effort.”
Asked whether geography adds to the difficulty of accessing directors, Jackson is based in Canada, Gilshan in England, both disagreed. “We often travel to the US and give long lead times, sometimes up to six months, to give companies a chance to arrange meetings,” said Gilshan. The two have offered to meet with board members wherever they are based rather than insisting they come to the company’s HQ, making it easier for them to meet the shareholders’ requests for a discussion.
These cultural differences do not extend simply to arranging a meeting; there are distinctions even once a meeting has been set up. UK non-executives rely on a wide range of sources of information: media, independent reports, other non-executive directors, and other shareholders. In the US, board members tend to rely largely on information they get from management.
And it’s not just pay where behaviour is different. For example, the average UK non-executive director gets between 92 per cent and 94 per cent support. It’s highly unlikely that a non-executive would fail to receive such a vote.
This is largely because UK companies don’t wait for the vote but know well in advance if there’s a problem director and would actively withdraw their nomination.
In contrast, in the US, a majority of shareholders often vote against a director, who subsequently offers to resign, but the company does not accept the resignation and they keep their board position.
In addition, despite the recent success of proxy access proposals in the US, if a UK shareholder wanted to nominate a non-executive director there would have been dialogue with the company and there would have been no need for a proxy access proposal.
In the UK, the Stewardship Code has codified relations between companies and shareholders, into an engaged and accepting culture. There is no such code in the US, where engagement is still driven by the annual meeting. Say on Pay has increased engagement in the US, especially where companies lost the vote, but it hasn’t brought it up to the level found in other markets. “The UK’s not perfect,” cautioned Gilshan, “codes are not a panacea.”
However, the UK framework both encourages and facilitates engagement and the recent creation of the Investor Forum further extends the possibilities of quality engagement between shareholders and boards outside of the public domain.
In the US, shareholders often resort to making their campaigns public precisely because they can’t get access to the company or an appropriate response to their concerns. Shareholders initiate engagement via resolutions in many cases whereas in the UK there are few shareholder resolutions. Even when there are, the differences are stark in terms of how a company responds. As everyone knows, the ‘Aiming for A’ resolutions at BP and Shell were supported by management.There are public showdowns in the UK; BG Group’s CEO pay debacle, for example, where the company was forced to accede to shareholders’ demands that the pay package for the new CEO be significantly reduced. But these public spats are rare. In contrast, lack of access in the US forces shareholders to play out campaigns in the media and in the courtroom. Disputes with shareholders about whether Cheniere Energy won or lost a vote to approve changes to its share incentive plan, for example, had to be resolved in the courts.
But it’s more than that, it’s about consultation before a problem arises. A second failed Say on Pay vote in the UK would be unlikely because new legislation requires NEDs to disclose engagement following a “significant” no vote. Part of this is the effect of legislation, but also the influence from groups such as the GC100, the voice of general counsel and company secretaries working in FTSE 100 companies, which has specific advice for counsel to guide their reaction to a negative vote.
“Our largest equity market is the USA so we are simply trying to undertake our stewardship responsibilities there as well as elsewhere in the world where we invest,” said Gilshan.
“We are encouraged by the US boardroom doors beginning to open,” said Jackson, “but there is a way to go towards board level interactions delivering better outcomes for shareholders.”
“Access to public capital globally comes with rights and responsibilities, regardless of cultural background,” added Gilshan. Summed up Jackson: “If you want to use our capital, you need to be open to us.”
Paul Hodgson is an independent governance consultant.