UK explores giving “binding vote” to shareholders on executive pay

Wide-ranging review of “Corporate Britain” launched

The UK government is exploring the idea of giving shareholders a “binding vote” on remuneration at companies, according to a speech by Business Secretary Vince Cable.
The comments came as the government today launched a wide-ranging review into short-termism, with a focus on the interface between investors, their agents and companies. The 38-page call for evidence A Long-Term Focus for Corporate Britain has been sent to around 700 interested parties.
Cable said the review “should produce a rounded account of the issues that may be causing a dislocation between what is best for the ultimate owners, the incentives of their agents, and what is best for managers [executives]”.
In a speech to the Confederation of British Industry, he added: “The best way to achieve this is surely to strengthen the relationship between shareholders and the managers they are paying. It is, after all, their money!
“We want to ask whether shareholders are being told enough about the basis on which managers are paid, and whether they should have a binding vote on practices that may be against their interests.”
The consultation document itself does not use the term “binding vote” in its wording, merely asking whether shareholders are effective in holding companies to account over pay. “Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?” it asks. Shareholders alreadyhave annual advisory votes on firms’ Directors Remuneration Report. The call for evidence notes that the quality and quantity of engagement is “very difficult to measure” due to its confidential nature. But it cites claims that engagement falls short as there’s not enough effective engagement “on issues of substance”.
It claims engagement may not drive the investment decisions of fund managers as investment teams have the final say on investment decision making.
Another focus is the pay of asset managers. “Investors suffer if the fund managers acting on their behalf take too much out of the system.”
It says: “The asymmetry of information between ultimate investors and the intermediaries acting on their behalf, and opacity of the investment process may allow fund managers to capture increasing rents at the expense of the ultimate investors.”
The document poses a series of questions on the “pivotal” relationship between shareholders, their agents and companies:
The most effective forms of engagement? Is there sufficient dialogue between corporate governance and investment teams in fund managers? The importance of voting as a form of engagement? The benefits of disclosure. The costs/benefits of action to encourage longer holding periods? Adressing agency problems in the investment chain. Greater transparency in the role of fund managers, their mandates and their pay?
The consultation will close on January 14 next year, with the government’s proposals to be published by April 14.