How long can a management afford to turn a deaf ear to its shareholders' wishes? This week's vote on the remuneration package for directors at GlaxoSmithKline (GSK) was a humiliation for its directors, forcing a bruising and very public battle during which the company's management conceded that change was due.
Significantly, the vote on GSK's executive pay packet is no more than advisory. Even a 100 per cent vote against would not have compelled the company to renegotiate contracts. Unhappy shareholders can do little more than sell out.
However, as the GSK vote demonstrates, British shareholders, at least, may not need the force of law to get management to listen.
Mr Geoff Lindey, strategic adviser on corporate governance to the National Association of Pension Funds, a leading shareholder group, notes that GSK had promised a root and branch review of its executive pay policies and promised to restructure its board, even before the votes were tallied.
Still, GSK, observers say, paid little heed to warnings from shareholders. It declined to renegotiate with its senior executives on pay despite them. Only when it appeared at serious risk of a humiliating defeat did the company announce plans to overhaul its remuneration structure.
And it is still unclear how wholehearted any such moves will be. In the immediate aftermath of the annual meeting, a spokesman, while accepting the result had to be taken seriously, said: "Obviously, all these votes are advisory, so legally we don't have to stop anything."
The company was subsequently attacked for failing to reveal the number of abstentions at the contentious annual meeting. Schroder Investment Management, one of the 15 largest shareholders in GSK, complained that the way voting results were disclosed disguised the extent of investor opposition.
"If this is any indication of the attitude and approach that will be taken in the forthcoming reviews, it bodes ill and is most unwelcome. This needs to change," wrote Mr Iain Richards, head of corporate governance at Schroders.
In recent months, a series of shareholders' groups have spoken out against "golden parachute" packages for departing executives at the heart of the current dispute, which they dub "reward for failure".
British institutional investors' position has been strengthened by a new law that took effect in January. Senior directors are now required to reveal the details of their pay packages. It is not always a pretty picture. At some companies, shareholder value has been destroyed while senior executives have enriched themselves.
Although no GSK executives have been accused of anything illegal, shareholder revulsion at pay packages rides a tide of dissatisfaction with corporate corruption and greed. The telephone-number pay packages handed out by Enron, WorldCom and Tyco added to public resentment of wrongdoing at senior level in those companies.
"I suspect there is a certain amount of revulsion about what has gone on," says Mr Peter Montagnon, head of investment affairs at the Association of British Insurers. "We've had some pretty egregious things take place."
GSK has defended its pay package, saying that it must offer competitive terms in order to attract the best talent. And the competition for talent is keenest in the US, where GSK earns 54 per cent of revenues, where chief executive Mr Jean-Pierre Mr Garnier is based and where the pay packages are so much more generous than they are in the UK.
Indeed, one US corporate governance advisory firm, Institutional Shareholder Services, was in favour of the GSK package.
However, another US shareholder, CalPers, publicly announced its intention to oppose the package, signalling that change is afoot among US shareholders. In the US, big pay packages have not attracted the same opprobrium as they have in the UK, with shareholders saying high pay is a fair trade-off for high returns.
Now, however, executive pay is becoming an issue in the US, thanks to revelations of generous compensation packages for directors.
The bursting of the stock market bubble worldwide and the unearthing of the extent of corporate greed at failed companies has made ordinarily quiescent shareholders angry.
Moreover, governments are starting to take a hard look at how to ensure that companies are run for the main benefit of shareholders, not management.
Mr Stephen Davis, head of Davis Global Advisers, a Boston-based international corporate governance consultancy, notes that, until now, US companies have ignored resolutions from shareholders, even those supported by a majority of investors.
In the US, resolutions, he says, are either binding or non-binding. Those that are binding require support from two-thirds of shareholders under US securities laws and are nearly impossible to achieve. Non-binding resolutions can legally be ignored.
This month, the Securities and Exchange Commission signalled it was unhappy with the ability of managements to ignore shareholder resolutions and quietly unveiled a review of rules on proxy voting.
Mr Davis says: "This could be the most significant development in corporate governance in years."
Returning to this week's spat, he says: "These shareholders are raising an issue that goes to the heart of capitalism ... is management remunerated to behave in the best interests of shareholders?"
Unless pay packages encourage the type of behaviour that achieve value long-term, they benefit no one but their recipients, he warns.
GSK has said it will return with proposals within three months. In the meantime, shareholder activism will move on. Already, Tesco and HSBC bank are being lined up in their sights. - (Financial Times Service)
