LGIM tells companies to stop wasting its time on exec pay

‘Investors have put in strenuous efforts to engage and their feedback seems to have fallen on deaf ears’


Jessica Tasman-Jones

Legal & General Investment Management’s decision to step back its engagement on executive pay has thrust the governance issue into the spotlight as it tells remuneration committees to stop wasting its time seeking feedback they do not plan to implement.

In November, the Financial Times reported the £1.3trn asset manager will now refer companies to its policy document when they seek information on its approach to executive pay.

LGIM informed companies about the changes in its annual letter to remuneration committees, which has not been made public.

In an interview with the Financial Times, LGIM senior global ESG manager Angeli Benham said most companies did not act on the feedback given on executive pay and the company’s time was better spent engaging on other areas, like income inequality and climate change.

“For example, they write to us saying they’re going to increase the chief executive’s bonus from 150% of salary to 200% of salary,” Benham said in the interview. “Our feedback is to say LGIM cannot support that, but they do it anyway.”

‘Their feedback seems to have fallen on deaf ears’

LGIM’s letter is not public, but the details that are known call into question how much headway asset managers can make on the issue of executive pay.

SRI Services founder and ESG Clarity Committee member Julia Dreblow says LGIM has a reputation for taking ESG seriously.

“What I suspect this indicates is a desire to focus on what works rather than keeping doing the same thing and expecting different results.”

The asset manager has seen some staff churn this year with Sacha Sadan exiting in April to lead the Financial Conduct Authority’s sustainable finance policy. Sadan’s replacement, Kurt Morriesen, was only announced in November and will start in January, reporting directly to chief executive Michelle Scrimgeour.

Minerva Analytics chief executive Sarah Wilson thought LGIM’s announcement came as no surprise. “There has been considerable frustration about the remuneration consultation process over the years. Investors have put in strenuous efforts to engage and their feedback seems to have fallen on deaf ears.”

LGIM voted against 37.5% of new pay policies at UK companies in 2020 and that number is set to be higher in 2021.

Opportunities for engagement

But other asset managers ESG Clarity sister title Portfolio Adviser spoke with remain committed to engaging companies on executive pay.

“Although it can be frustrating when concerns are not addressed, over the years there have also been numerous occasions where engaging with companies has led to pay arrangements that better align management’s interests with shareholders and stakeholders more broadly,” says Aviva Investors head of corporate governance Nathan Leclercq.

Additionally, Aviva Investors can glean insights into a company’s governance and culture from its response, or lack of, to concerns raise about pay, Leclercq says.

BMO Global Asset Management continues to focus on issues such as payouts that are excessive or inconsistent with performance, misalignment of pay policies with investors and stakeholders, inappropriate KPIs used in pay plans, plus an excessive focus on short-term strategy.

“While we see those problems persist, we’ve seen a number of improvements,” says responsible investment vice-president Kalina Lazarova. “Where we find we’re most impactful, if we’re talking about the UK market, is primarily in the small and mid-cap segments.” Lazarova attributes that to the size of BMO Gam’s holdings in those companies and because those companies may be under engaged by the larger asset managers.

In 2020, the asset manager had around 300 engagements on pay issues.

Abrdn and BMO Gam both pointed to the alignment of executive pension incentives with the wider workforce as an example of the industry engaging successfully on pay, via coordination from the Investment Association. This has resulted in all but a few companies adjusting executive pension contributions accordingly, says Abrdn head of stewardship Mike Everett.

Executive pay remains an important issue for Federated Hermes’ shareholder engagement arm Eos. “We have long argued in our core principles for executive pay that the pay executives receive should be easy and clear to communicate to all stakeholders, including employees and the public,” says Amy Wilson, UK engagement lead for Eos. “We also expect boards to take into account wider workforce pay practices and ratios when judging the appropriateness of pay for executives.”

Executives insulating themselves from Covid effects

Covid brought with it new pay issues for asset managers to focus attention on.

“We set a clear expectation that boards should use their judgement to ensure that executives were not insulated from the impacts of the crisis when other stakeholders – including employees – were not, and we judged executive pay in the context of the employee experience,” says Wilson.

“This led us to oppose executive pay at companies including Vinci and Whitbread, where non-financial elements of the CEOs’ bonuses were judged to have been fully achieved and were paid or rolled over to next year respectively. This was despite the fact that both companies used government support to furlough employees and made redundancies.”

Eos also judged Hilton to be insulating executives from the effects the pandemic through adjustments to the long-term incentive scheme that resulted in higher payouts. That was despite the fact the company laid off 22% of its corporate workforce in 2020. Eos voted against the proposals and the re-election of the chair of the compensation committee.

Informa and Wizz Air are two companies that faced shareholder backlash during the pandemic, notes Lazarova.

Last year, 40% of shareholders rejected Informa’s plans to lower criteria against which its chief executive Lord Stephen Carter and chief financial officer Gareth Wright would be judged. This year, 60% of shareholders rejected the remuneration report forcing the company to enter a fresh round of consultation with shareholders.

A month later, shareholders supported Wizz Air’s proposals to grant chief executive Jozsef Varadi £100m worth of company stock if he can double the share price over the next five years. The voting rights of shareholders outside the European Economic Area have been reduced due to Brexit rules on airline ownership meaning only 16% of the company’s share capital took part in the vote.

Executive pay will always be on the agenda

7IM senior investment manager Camilla Ritchie says it is a shame LGIM has stepped down its engagement on pay, although she says the asset manager hasn’t given up on challenging executive remuneration because they will still be voting against egregious increases.

Several people Portfolio Adviser spoke with noted executive pay is one of the few areas shareholders can vote on directly via resolutions at AGMs.

In the UK, shareholders have an annual advisory vote on the company’s pay policy and a binding vote every three years. “Remuneration is therefore an almost continual topic of engagement between UK companies and their shareholders and this has been the case since 2013,” says Everett.

Cardinal Health is one example whereby Ritchie believes LGIM could use its voice to encourage change. In 2020, the company failed to take into account opioid settlement costs into the calculation of the executive compensation proposal “as if it was just some extraordinary item which had no relevance to the management of the company”, she says.

Despite significant opposition, the resolution passed. “The board would have no doubt taken note of this and this may have led to changes in the next year’s remuneration policy but, of course, this time without LGIM engaging with the company to try to persuade them to change their policy ahead of the AGM,” Ritchie says.

This article originally appeared in ESG Clarity’s sister publication Portfolio Adviser.

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