It is easy to forget that along with all its other activities, the Co-operative Group is also a powerful shareholder in many of the UK’s leading companies. A new report from Co-operative Asset Management not only reminds us of this, but also makes clearer how it exercises its vote at companies’ general meetings.
With the controversy over remuneration of the banks’ executives continuing, it is reassuring to learn that the Co-op has been a critic of the worst practices. Other insurers and institutional investors have failed to properly engage with the management of the PLCs in which they invest.
These investor failings were addressed in the Walker review of corporate governance in UK banks. Sir David Walker concluded that institutional investors need to become more engaged in the PLCs in which they invest. Being ‘sleeping shareholders’ is not good for the company, nor for the institutions’ own clients.
By contrast, Co-operative Asset Management increased its negative voting participation substantially this year, reflecting the widespread pupblic unhappiness about corporate pay. In 30% of its shareholdings, it voted against companies’ remuneration policies – a jump from 19% in 2008. The Co-operative did not support the remuneration policies of most companies it invested in – voting in favour of 43%, compared to 51% the previous year.
Co-operative had previously voted against Northern Rock remuneration reports; has refused to support RBS executive remuneration continuously since 2002; and was one of a few institutional investors to vote against the ruinous RBS/ABN-AMRO deal.
Yet Co-operative Asset Management reports that pay policies are not improving. It surveyed 30 companies in the banking and financial services sector of the FTSE 350 and compared those with 30 companies from other sectors (chosen randomly). It found 11 of the 30 finance companies had what it called ‘shareholder unfriendly’ remuneration practices – in which the effect of the policies is to divert wealth and value away from shareholders to the directors. Fewer, eight, of the non-finance companies had ‘shareholder unfriendly’ remuneration practices.
The survey also found that discretionary payments and undesirable employment contract provisions, such as guaranteed bonuses and golden hellos, are more prevalent in the finance sector. Worse still, finance and other companies are introducing ‘ad hoc’ rewards to get round the pressure to end traditional bonus schemes.
A minority of companies are beginning to recognise the prevailing concern about remuneration policies – and anticipated the demand from the Walker review for active engagement with shareholders. There was a 41% increase in approaches from PLCs to Co-operative Asset Management to discuss remuneration policies.
Unfortunately, notes the Co-operative, this has not led to more constraint in pay practices. Other institutional investors must share the Co-operative’s critical approach to remuneration policy for this to feed through into real change in how PLCs reward staff.
“Our remuneration analysis shows that incentive schemes continue to be poorly designed with significant discretionary cash bonuses, excessiveness in overall remuneration packages and rewards not being linked to stretching performance targets,” says Abigail Herron, corporate governance manager at The Co-operative Asset Management. “If any lesson should be learnt from the financial crisis, it must be that remuneration policies need to be aligned to long-term sustainability of the business and its shareholders, and not designed to protect the pockets of directors.”
Bankers’ pay contrasts starkly with most other workers. Analysis by the New Economics Foundation of six jobs found that there is no relationship between the value to society of a job and its remuneration.
Waste recycling workers generate £12 for society for every pound they are paid; hospital cleaners generate £10 of social value for every pound earned; and childcare workers produce £7 to £9.50 of social benefit for every pound they earn. The profession that comes out worst are tax accountants, who (by helping clients avoid paying tax) destroy £47 in value for every pound they earn. City bankers do ‘better’ by ‘only’ destroying £7 of social value for every pound they generate. NEF also concludes that banking contributes 3% in value added to the UK economy, compared to 12.5% by manufacturing.
There is a resonance here with recent comments from Lord Turner, chairman of the Financial Services Authority. Bankers’ activities, he suggested, often have no social value. There was an immediate outcry. It is hard to see why. It is self-evidently true, but hardly in the interests of bankers to let the public realise this.