Limits of influence

Naming and shaming 

JD is not alone in facing protests. The Investment Association compiles a public register of those companies where more than 20 per cent of shareholder votes are cast against annual meeting resolutions. Below is the latest register of the votes cast against remuneration reports so far this year (which was last updated to the end of May):

These votes are advisory so, while companies are not bound by them, they are expected to respond. A typical response was JD’s, which said it would conduct a “review of its practices from a corporate governance perspective... and will focus, amongst other things, on remuneration issues”.

Some of these votes were to be expected. Gulf Marine Services (GMS), now reduced to a microcap, providing advanced self-propelled self-elevating support vessels, had warned about profits and a potential breach of its banking covenants. The vote at Lonmin, a platinum producer, was academic since it was being taken over. At Micro Focus International (MCRO), a global software company, this was the first chance for shareholders to express their displeasure since its shock profit warning in March 2018. At its previous annual meeting only 13.5 per cent had voted against the remuneration report.

More surprising was the vote at Clarkson (CKN), mainly a shipping broker, where the pay that Andi Case received in 2018 was the lowest since his appointment as chief executive in 2011. He had warned about external headwinds, but even so, “we are very disappointed by this outcome”, the directors said, “particularly as more than 99.7 per cent of shareholders voted for the re-election of the CEO and CFO and, as such, deem the stewardship of the company to be in capable hands…". At Segro (SGRO) too (a developer and manager of warehouses and industrial property) the directors couldn’t help pointing out the paradox that “the new Remuneration Policy and amendments to the Long Term Incentive Plan were passed with over 80 per cent of votes in favour” while “the Remuneration Report [had] a significant minority of votes [46.7 per cent] against it”.

The pay triangle

A common theme among the other offenders is that, compared with their own experience as shareholders, investors considered that executive pay had been out of proportion to company performance. Underpinning this is a tricky question: exactly how much, then, should each of these chief executives have been paid? 

One way of determining this is to look at the three-way pull of often opposing factors:

• Personal expectations. Not an easy one this, because it’s human nature to want to be paid more each year. Outcomes depend on the art of compromise, but, occasionally, bluffs are called and valued executives are lost. Last month, MJ Gleeson (GLE), which builds houses and trades land, announced that: “Following extensive discussions with Jolyon Harrison about his remuneration... the board concluded that it was not possible to find a mutually acceptable basis for Mr Harrison to continue as chief executive.” Mr Harrison had been in this role for seven years.
• Internal comparatives. People will always compare themselves with others doing similar jobs. Internal comparisons are less of an issue for those at the top, although the differential with their direct reports can be contentious. But social inequality has wider political implications, and the gap between executive and employee pay is being increasingly scrutinised. 
• External comparatives: what do other organisations pay for roles of a similar size? People have an uncanny habit of comparing themselves with their perceived peers and picking out anomalies that they think disadvantages them. 

These comparisons are complicated by another factor: structuring pay to reward success, and not to reward failure. How do you compare the relative success of one chief executive against another, let alone the different forms of pay that’s attached to their performance? Even so, this triangle helps in determining fixed pay (salary and benefits), the likely variable pay (the level of bonus and share awards) and indeed the overall potential pay package. 

For JD, the three elements of the pay triangle were pulling in different directions, and its shareholders evidently reached their own conclusion about which one held most sway.

Headwinds

At the other end of the spectrum, investors are to be asked (early next month) to decide on the future management of Ventus. Ventus manages two Venture Capital Trusts (VCTs), which combined are worth more than many microcaps, such as Gulf Marine Services mentioned above. These were set up in 2005 to fill a niche by investing in companies that constructed and developed renewable energy projects in the UK – especially on-shore windfarms, but also hydro-electric and landfill gas. These projects were too small to attract large development companies or utilities, and a significant challenge was to assess the viability of new proposals.

In their early days, this was an area fraught with risk, and when problems emerged in 2011, the directors ended up sacking the management company. A new company, Temporis Capital LLP, was employed to assess and recommend new investments, sort out the issues with its existing ones, and to manage the projects on an ongoing basis. For this, Temporis received an annual fee of 2.5 per cent of Ventus’s net asset value.

In April 2016, new energy generation projects lost their favourable VCT tax treatment, and so Ventus stopped making new investments. Since Temporis’s role has shrunk to just managing the existing operational projects, the question is: by how much should its fees be reduced?

What was agreed was a cut of fees to 2.25 per cent from November 2017 and then 2 per cent from November 2021. Some shareholders objected. This was too generous, they said. How can each VCT justify still paying Temporis £1m a year? The directors eventually thought again and renegotiated the fees down to 2 per cent in 2019 and 1.5 per cent from August 2020. However, by then ShareSoc, the UK Individual Shareholders Society, had gathered sufficient signatures to table resolutions at the Ventus VCTs’ annual meetings which are taking place on 8 August. The activists say that an even better deal can be negotiated, but since the existing directors won’t budge, “the only way to do this is to vote to remove them”. Shareholders will vote on appointing new ones proposed by the action group.

The constant dilemma for outsiders is that they don’t have detailed inside knowledge. This is where the pay triangle comes in again:

• Pay expectations. Temporis has a smaller role now, but the Ventus directors argue that proactive management is still vital. Downtimes have to be planned, and unplanned ones kept to a minimum. Upgrades must be supervised. Engineering specialists are needed to analyse data to see how to improve performance. Commercial contracts have to be negotiated. And then there’s the managing of costs, such as “site management, insurance, management oversight systems, auditing, reporting and appeals against business rates assessments”. All this comes at a price. What would be the minimum fees that a management company should reasonably expect?

• Internal comparisons. There are no similar roles within Ventus, of course, but there are other internal references. For example, ShareSoc argues that the fees paid to Temporis are almost 50 per cent of the dividends paid to shareholders and that this is too high. 
• External comparisons. What fees do other VCTs pay? ShareSoc gives as an example Gresham House Renewable Energy, which is about the same size as Ventus, although its focus is solar power. It too has faced operational challenges. The management fee on its VCTs is 1.15 per cent.

Reform, what reform?

VCTs are mostly owned by small shareholders, so the Ventus meeting on 8 August is an annual meeting where individual votes can really make a difference. But there’s a problem. ShareSoc says that almost a third of Ventus’s shares are held on platforms, and it’s the platforms’ nominee companies that are on the share register. Whether their beneficial owners (the private investors) hear about the significance of the votes on 8 August depends on whether the platforms forward shareholder communications. Alliance Trust does, for example. But its platform has been taken over by Interactive Investor and whether it will adopt the same policy remains to be seen.  

Enabling beneficial owners to vote could be made mandatory. But that depends on government action – this is another overdue reform that Brexit seems to have consigned to the long grass.