Can remuneration committees and activists ever be on the same page?

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By Jeremy Daniels – Jeremy.Daniels@EthicalBoardroom.com

The corporate governance landscape has undergone numerous substantial changes over the last few years and this trend is moving forward progressively. As part of this discussion director pay and remuneration policy have become contentious issues of focus. Shareholder activism has understandably grown rapidly since the financial crisis of 2008. Companies are facing tougher rules across the globe with regards to how remuneration policies are implemented and shareholders are increasingly being asked to approve remuneration policies at periodic shareholder meetings. This has created a new potential avenue for activist shareholders to exert their point of view.  

The role of directors and management of an enterprise is to serve the interest of the shareholders – but this has not always materialised in the day to day workings and decision making of enterprises. In the past certain investors, even those with major stakes, have felt powerless when it comes to affecting board decisions and have also felt that they have had to accept certain company decisions that may have been detrimental to shareholder interests. Shareholders have historically been left little choice but to support board made decisions even if they are often not necessarily in the interests of the organisation longer term. 

One particular issue comes up time and time again – that of inexplicably large pay and remuneration packages. Investors are taking back power through shareholder activism and have found that shareholder activism can be used to alter the company’s direction should it be required. Shareholder activism has been used in the past to voice stakeholder objections to unethical practices at annual general meetings. However, shareholder activism is increasingly being used to facilitate a vital safeguard against remuneration irresponsibility. 

Across the globe, remuneration committees are tasked with applying increased disclosure, discipline and accountability in this area. Remuneration committees are put in place in order to ensure the remuneration procedures and arrangements of an organisation are set up such as to support and be aligned with the strategic aims of a business as well as the relevant stakeholders. The committee must furthermore at all times guard the remuneration processes whilst maintaining clear and definite compliance with relevant regulation and requirements.  

It can be argued that remuneration committees and shareholder activists may be operating at opposing aims in some regards. The remuneration committee responsibilities include a supervision of the recruitment provisions including retention and motivation incentives for senior executives with regards to pay and compensation. As part of their role the remuneration committee must ensure staff, in particular senior staff are compensated and incentivised adequately – it can be argued that they may work to maximise senior company member compensation whilst shareholder activists work to achieve the opposite. This has been a particular problem in the past when this maximisation has been to the detriment to the company and has been the product of certain undisclosed relationships and irresponsible decision making between senior members of the company.   

Understandably this has led many interested parties to question whether remuneration committees and activists can ever be on the same page? However, the two parties are not necessarily always working at odds. Shareholder activists are pushing for increasing amounts of disclosure, fairness and ethical practice. Meanwhile remuneration committees are increasingly being tasked, both externally and internally, with providing, implementing and monitoring the framework for a fair and transparent remuneration policy – acting within increasingly stringent corporate governance requirements and regulations. In this sense the two parties are indeed on the same page currently.

At the moment it seems that both individual and institutional activist shareholders are building pressure on organisations to be more responsible and fair when it comes to remuneration – and remuneration committees have similarly been directed in their role towards achieving these aims. Shareholder activism has been building over the last five years across the globe – with particular popularity and success in the US.  

Public, media and political pressure on corporate governance and remuneration policy has led to an increased focus on director performance and related outcomes and should over time result in better run businesses with improved long term returns for investors.