Votes on executive pay should be held every year and remuneration board directors required to step down if more than 25% of shareholders rebel, fund manager Fidelity has recommended.
In its submission to the government’s current consultation on a shake-up of corporate governance and pay, the investment group said personal culpability would make ‘individuals more accountable’, and that the frequency of the votes should be increased from every three years to annually.
It pointed to a range of behavioural factors in opposing the government’s proposed binding vote on pay however, saying it would ‘give rise to serious contractual complications and could damage the UK’s competitiveness as a destination for companies’.
Awareness of these outcomes could dis-incentivise major shareholders who would otherwise oppose boards it suggested, in addition to encouraging pay committees to highball compensation ‘given the decreased certainty of receipt’.
Fidelity runs approximately £19 billion in UK equity, almost all of which is actively managed, out of a total £224 billion globally.
Alongside Legal & General, the company has been at the more active end of the large fund managers in exercising its voting rights, having successfully pressured many boards to extend incentive scheme minimum holding periods from three to five years.
Since notifying boards that it would regard the provision as a red line in 2013, the number of FTSE 100 firms applying a five-year minimum requirement has risen from four to 50, it claimed.
No pay cap
The business also said it would not support a pay-cap, as it would likely incentivise businesses to level-up remuneration to the maximum permissible.
‘Initially we were drawn by the suggestion of a pay ratio reporting requirement but after further reflection we have turned against the idea because we are unconvinced that the disclosure of pay ratios in themselves will tell us much about a company’s approach to pay,’ the company said in its submission.
‘Different industries will give rise to very different pay ratios and even if the ratios are accompanied by detailed explanations it may be difficult to make meaningful comparisons.
‘We are also mindful of unintended consequences and are nervous that over time pay ratios could give rise to distortions as companies manage their businesses so as to produce a desired ratio. An example might be a decision to subcontract lowly paid roles or to hire more temporary staff.’
The house also proposed a ‘Sports Direct’ clause to corporate voting rules, designed to prevent a large shareholder from blocking a broader expression of censure, as happened at the controversial retailer’s AGM last year when majority owner Mike Ashley blocked an attempt to remove the chair.
‘In 2014 the Financial Conduct Authority introduced a new dual voting process for the election or re-election of independent directors at premium listed companies whereby such appointments had to be approved by independent shareholders as well as by shareholders as a whole,’ Fidelity noted.
‘We would suggest a rule change which does not permit the controlling shareholder to vote in any follow on vote on the re-election of the chairman specifically.
‘The votes of any controlling shareholders would only be restored for the election of the chairman when it has been demonstrated that the chairman has the support of a majority of the outside or minority shareholders.’