Investor Protest Votes on Pay Here to Stay

Company directors will remain under pressure from shareholders over executive pay long after the market downturn ends and lawmakers stop the heckling that has helped prompt votes against remuneration policies at this year's annual meetings.

Investors and directors say the days of shareholders rubber-stamping company resolutions at Annual General Meetings (AGMs) is over and directors will have to get used to investors being more vocal on many areas of company business.

"Investors are getting more active, and not just the fringe activist type hedge funds but also mainstream investors. And I think that's quite a good sign," said DeAnne Julius, who sits on the board of Swiss drugmaker Roche and U.S. property group Jones Lang LaSalle.

"Boards have not really yet awoken to the amount of anger that there is out there," said Julius, who previously sat on the remuneration committees of oil giant BP and Britain's bank Lloyds bank.

The current Annual General Meeting (AGM) season has seen a series of blue chip European and U.S. companies receive bloody noses from investors voting against pay proposals.

Data from pay consultants PIRC show the average percentage of shareholders voting against remuneration reports has nearly doubled to 5.95 percent in 2011 from 3.28 percent in 2006.

The banking sector has felt the brunt hardest. Significant minorities of investors at Credit Suisse, UBS and Barclays voted against the companies' pay reports in advisory votes. At Citigroup and UK insurer Aviva only a minority backed the plans.

Other sectors also felt shareholders' ire. Twelve percent of BP investors opposed its remuneration report, as did 39.7 percent of shareholders at British satellite company Inmarsat.

In the United States, casino equipment maker International Game Technology got only 44 percent shareholder support for its pay vote.

Although business leaders frequently defend high pay awards as necessary to keep talent, boards are clearly feeling the pressure to be seen to have pay under control.

"This year the institutions are very keen to be seen to be exercising stewardship more closely than they have in the past," Barclays chairman Marcus Agius said after his bank's AGM at which 27 percent of its investors opposed its pay plan.

For now, shareholder votes on pay at annual meetings are only advisory. But there is a rumble of demand for them to be made binding, as schemes adopted by companies on advice from pay consultants are viewed as failing to link pay to performance.

"The whole system of incentivization has become too complex and lost the link with shareholder value," said Ivor Pether, senior portfolio manager at Royal London Asset Management, which manages over 40 billion pounds of assets invested globally.

"This has been building over several years and the fact that there has been so little reaction from remuneration committees to the signals that shareholders have been sending out informally, means that a binding vote is required," he said.

POLITICS

The rapid rise in bosses' pay while average incomes stagnate and unemployment soars has made executive compensation a hot political topic in Europe. Leaders across the continent have felt pressure to criticize large payouts.

France's Francois Hollande made public outrage at executive pay a theme of his successful campaign to defeat Nicolas Sarkozy for the presidency. He has promised to tax income of more than 1 million euros at 75 percent.

Britain's Conservative Prime Minister David Cameron has promised legislation this year to tackle high executive pay, and leaned hard on bosses to give up bonuses at banks that were partly nationalized in bailouts after the 2008 financial crisis.

The British government has proposed making AGM pay votes binding, over the protests of business leaders and some fund managers who complain that would tie managers' hands and make it hard to retain talent.

Even if governments decide against introducing binding votes on pay, directors will not be off the hook because shareholders seem to have dropped their hands-off approach for good.

A report published by Ernst & Young said newfound shareholder activism could extend to other areas besides pay, with directors increasingly facing the prospect of shareholder votes on other issues like social and environmental policy.

Corporate governance campaigners want to require fund managers to disclose to ordinary investors how they vote on their behalf at AGMs on issues like pay and directorships.

Catherine Howard, CEO of FairPensions, a shareholder activist campaign group, said small investors in big funds have a right to know whether portfolio managers are engaged in overseeing the companies where they invest their clients money.

"We need to turn the debate onto how to make that party more accountable to their customers and beneficiaries," she said. (Writing by Tom Bergin; Additional reporting by Christian Vellacott; Editing by Peter Graff)