With the continuing controversy about bank executives’ remuneration, it is reassuring to learn that the Co-op has been a critic of the worst practices. Other insurers and inst-itutional investors have sometimes 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 with the PLCs in which they invest. Being “sleeping shareholders” is not good for the company or for the institutions’ clients.
By contrast, Co-operative Asset Management increased its negative voting participation substantially this year, reflecting widespread public unhappiness about corporate pay. In 30 per cent of its shareholdings, it voted against companies’ remuneration policies — a jump from 19 per cent in 2008. The Group did not support the remuneration policies of most companies it invested in — voting in favour of 43 per cent, compared to 51 per cent the previous year.
The Group had previously voted against Northern Rock remuneration reports, has refused to support RBS exec-utive remuneration continuously since 2002 and was one of the few institutional investors to vote against the disastrous 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 concern about remuneration policies — and anticipated the demand from the Walker review for active engagement with shareholders. There was a 41 per cent increase in approaches from PLCs to Co-operative Asset Management to discuss remuneration policies.
Unfortunately 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 result in 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 learned from the financial crisis, it must be that remuneration policies need to be aligned to long-term sustainability of the business and its shareholders.”
Bankers’ pay contrasts starkly with most other workers. Analysis of six jobs by the New Economics Foundation found that there is no relationship between the value of a job to society 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 professional that comes out worst is tax accountancy. By helping clients avoid paying tax, tax accountants 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 three per cent in value added to the UK economy, compared to 12.5 per cent from manufacturing.
There is a resonance here with recent comments from Lord Turner, chairman of the Financial Services Authority. Bankers’ activities, he suggested, frequently 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.