Unfortunately, the FRC statement makes no mention of minority interests*, and many view the primacy of ‘managed money’ on share registers as one of the chief reasons why industry oversight is lacking – or seen to be lacking.
Persistent and vocal criticism of the role of remuneration committees, specifically a perceived failure to align director compensation with underlying corporate performance, has already resulted in enhanced shareholder voting rights on executive pay, albeit in a watered-down version from the original proposals. The Enterprise and Regulatory Reform Act 2013 compels companies to seek shareholder approval for their forward-looking remuneration policy at least once every three years, but it has undoubtedly given rise to increased shareholder activism on an ongoing basis.
Indeed, The Investment Association recently confirmed that its Institutional Voting Information Service issued a “red top” on the remuneration report of Unilever (ULVR). (The trade body issues these alerts to highlight areas of concern and reflect any breaches of best practice). This year, the vote on the group’s remuneration report is only advisory, or non-binding, so it won’t precipitate any action by Unilever, but a shareholder revolt certainly wouldn’t help on the PR front, particularly as the consumer giant has chosen to relocate its main headquarters to Rotterdam, and is looking to alter the terms of its compensation structure, which would scale up potential salary increases and incentive issues for executives.
Of course, Unilever hasn’t been singled out for criticism. Other public companies, including Reckitt Benckiser (RB.) and Persimmon (PSN), have also been in the dock over their remuneration policies, but there’s an overriding issue in terms of oversight – one that could result in far more drastic regulatory reforms. Some may ponder whether the nominal independence of remuneration committees can ever be guaranteed when the widespread cross-fertilisation of boardrooms gives way to conflicts of interest, but recent tribulations linked to the collapse of Carillion (CLLN) have intensified the focus on what some believe to be systemic and organisational problems that are not only bringing the UK audit process into disrepute, but also eroding investor confidence.
Investors will need no reminding of the scandal that overtook Tesco (TSCO), resulting in probes from the Serious Fraud Office, the FRC, and the Groceries Code Adjudicator. As with Carillion, investors in the grocery giant were blindsided; in the case of Tesco by a £263m accounting black hole, which ultimately resulted in a cull of senior executives, a fraud trial and the replacement of PwC as the group’s lead auditor by Deloitte after an unbroken sequence of 32 years.
That PwC was forced to hand over audit duties to a fellow member of the so-called ‘Big Four’ only serves to highlight the underlying problem – the dominance of Deloitte, PwC, KPMG and EY. New EU rules for auditor rotation with mandatory re-tendering were implemented midway through 2016, but their effectiveness is open to question. So much so that accountancy firm Grant Thornton has decided to curtail bidding for audits of FTSE 350 companies after repeatedly losing out to the ‘Big Four’.
