U.K. CEOs Shouldn’t Count on Pay Hikes at AGMs, Investors Warn

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British companies from Unilever Plc to BP Plc are heading into the AGM season, and investors are warning managements against trying to push through big bonuses or anything else that smacks of inequity.

A year after the coronavirus pandemic sent the world into a tailspin and widened the inequality gap, investors say they will slap down proposals at annual general meetings that exacerbate that trend. Unreasonable bumps in CEO compensation or a lack of diversity on boards will be sanctioned at the meetings as environmental, social and governance issues increasingly become part of investing metrics.

U.K. CEOs Shouldn’t Count on Pay Hikes at AGMs, Investors Warn

“This year more than ever, companies and remuneration committees need to be sensitive to the broader context and experience of their workforce,” said Amra Balic, head of BlackRock Inc.’s investment stewardship for Europe, the Middle East and Africa.

Investor enthusiasm for ESG has skyrocketed, with brisk investment inflows seen in the past months. While a focus on the environment produced many of last year’s best-performing funds, the uneven impact of the pandemic is now putting social concerns in the spotlight.

“There’s a lot of fairness issues being looked at,” said Andrew Jones, a portfolio manager at Janus Henderson Investors.

Millions in the U.K. are unemployed or on a government furlough program that pays 80% of wages to people whose workplaces had to close. Others have felt little pain, managing to work from home. Sectors like travel and leisure suffered from lockdown restrictions, while grocery and food delivery companies thrived, showing the uneven fallout from the pandemic. Those will be factors when weighing executive compensation, investors said.

U.K. CEOs Shouldn’t Count on Pay Hikes at AGMs, Investors Warn

“If the company has made large-scale redundancies and taken government help or taken shareholder assistance, then we wouldn’t expect any bonuses to be paid,” said Angeli Benham, senior global ESG manager at Legal & General Investment Management Ltd. “If bonuses were paid, then that would be a vote against for sure.”

Some suggest executives get no raises. Compensation in line with last year’s might be “completely reasonable,” if the company paid dividends, didn’t fire anyone and took no government aid, said Sara Razmpa, head of responsible investment at Unigestion SA.

Voting trends are already becoming evident. Almost a third of shareholder votes at newsagent and bookstore chain WH Smith Plc’s January AGM opposed its remuneration report, especially the salary increase CEO Carl Cowling got in July. Another previously announced raise in April will be postponed, and the company said it will continue to actively engage with shareholders on executive remuneration.

U.K. CEOs Shouldn’t Count on Pay Hikes at AGMs, Investors Warn

Royal London Asset Management Ltd. voted against compensation plans at several airlines and hospitality firms last year and will study those sectors again this year. Investors will also review other ways executives may be compensated -- like share plans.

“We have quite a lot of nervousness around the introduction of restricted share plans where they’re not performance linked,” said Neville White, head of responsible investment policy and research at EdenTree Investment Management Ltd. “It’s essentially free money for doing the job.”

Ethnic Diversity

Diversity is another metric in focus. Research by Green Park, an executive recruitment and diversity consultancy agency, found there were no Black leaders at any of the FTSE 100 stock index companies at the end of last year. About 14% of the U.K.’s population identified as Asian, Black, Mixed or Other ethnic group in a 2011 census.

In 2017, the Parker Review set a target for FTSE 100 companies to have at least one board director from an ethnic minority background by the end of 2021. “Significant progress” has been made -- with 74 firms having met the target as of November -- though there’s more to be done, Sir John Parker, chairman of the Parker Review Committee, said in a Bloomberg TV interview.

U.K. CEOs Shouldn’t Count on Pay Hikes at AGMs, Investors Warn

British Airways parent IAG SA, the London Stock Exchange Group Plc and sneaker seller JD Sports Fashion Plc are among companies yet to meet the target, although they still have nine months to do so. IAG will seek to further diversify its management and board composition, its latest annual report says. LSE said in its annual report it expects to meet the target this year, declining to elaborate. JD Sports declined to comment.

“If it’s a FTSE 100 company and it still doesn’t have at least one director from an ethnic minority background on the board, we will consider recommending voting against the chair, unless the company can demonstrate there’s a very credible plan in place to rectify that over the next 12 months,” said Amy Wilson, who works at EOS at Federated Hermes.

State Street Global Advisors is asking FTSE 100 boards to disclose the racial and ethnic composition of their boards and plans to take voting action from next year.

“Diversity is a trickle-down process,” said Robert Walker, its global co-head of asset stewardship. “If the board itself is diverse, then it’s likely that they are going to be taking this issue seriously.”

U.K. CEOs Shouldn’t Count on Pay Hikes at AGMs, Investors Warn

The U.K.’s biggest companies lag behind their U.S. counterparts on diversity. More than 90% of companies in the S&P 500 Index had at least one non-white director as of March 1, according to data compiled by proxy advisory firm Institutional Shareholder Services Inc.

Companies say finding individuals with the right mix of skills and experience is a challenge. Royal London suggests they widen their nets for suitable candidates and also institute programs like “board internships.”

“It’s trying to get beyond that chicken and egg problem of you can’t get the role unless you have experience, and you can’t get experience unless you get the role,” said Ashley Hamilton Claxton, its head of responsible investment.

A focus on gender is cited as a reason by some investors for not being more vocal earlier on ethnic diversity. But Trevor Phillips, chair of Green Park and a member of the Parker Review Committee, doesn’t think they should wait until next year to start voting against companies that haven’t met the target.

“They’ve had four years to meet it,” he said.

©2021 Bloomberg L.P.

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