Pension fund/company workshop on executive pay: a new era in investor engagement?

A recent workshop on executive pay which included representatives from both global pension funds and top UK companies could signify a new form of collaborative investor engagement.

It was organised by Hermes Equity Ownership Services (EOS), the engagement arm of the Hermes fund management business that’s owned by the BT Pension Scheme, and the National Association of Pension Funds.

The meeting in late February was attended by remuneration committee members at 44 FTSE 100 companies and by 42 international asset owners as well as the government’s Business Secretary Vince Cable. The event did not include asset management firms.

Institutional investors have been stung by criticism from the likes of former City Minister Lord Myners, who has dubbed them “absentee owners” for not holding firms to account.

But the new investor-company engagement on pay could herald “the beginning of the end of the ownerless corporation,” says Hermes EOS Chief Executive Colin Melvin. “The character of the discussion was very different,” he told a briefing today.

The identities of the attendees are not being disclosed and the meeting took place under the non-attributable Chatham House Rules format.

But it was so productive that a similar meeting is being planned in the US, in collaboration with Harvard University, later this year. This is still in the planning stage but is likely to take place in the autumn, Melvin said.
David Paterson, head of corporate governance at the NAPF, also said how encouraged he was by the willingness of companies to engage with pension funds. The aim was to get companies and their owners in one room, he said, “and it worked”.
The event was “one of the most worthwhile and stimulating on the subject of remuneration that I haveever attended” an unnamed chair of a FTSE100 remuneration committee is quoted as saying. “For those of us involved with FTSE100 companies, it is unusual to sit down with pension fund representatives and interesting to hear their perspectives.”

Both Melvin and Paterson stressed the event was the start of a long-term process.

“We want successful companies – successful companies pay dividends and pay pensions,” Paterson reiterated. The next step is that the NAPF will set up a working group of pension funds to liaise with remuneration committees and boards to ensure that top pay “is aligned with the long-term interests of pension funds and their members”.

“It is unusual to sit down with pension fund representatives”

The issue of breaching ‘acting in concert’ rules is not considered a problem, as price sensitive information is not being disclosed.

Hermes has put forward a series of proposals in a discussion paper ‘Proposed reforms to UK executive remuneration’. These include the suggestion that investors should be able to vote on the appointment of remuneration consultants at annual general meetings, similar to voting on auditor appointments.

On the subject of the government’s proposal that investors should get a binding vote on executive pay at AGMs, sentiment seems to be coming around to the idea.

Paterson said it has the potential “to really improve peoples understanding of pay – to improve both engagement and the structure of pay”.

“The more I think about it the more interesting it becomes.”