It’s taken a few years, but the revolt against extractive pay in banking is getting traction.
The UK fund manager Hermes* is leading a charge against the pillar of the German establishment, Deutsche Bank, over compensation and succession planning. Hermes, which is leading 27 funds that hold only 0.5% of the votes, is urging other shareholders to vote no on the annual resolution approving the supervisory board’s performance for the past year. A bit of background per the Financial Times:
The investor group is particularly angry that Europe’s largest bank by assets did not give shareholders the opportunity to vote on its remuneration report for last year. The bank’s move followed a rejection by 42 per cent of shareholders of the pay system the year before, the second worst voting result on such a matter in the German blue-chip Dax index. The bank has put the vote on executive pay back on to the agenda for the AGM.
Now this might seem as if this measure is getting headlines by virtue of coming right after the shareholder rejection of Vikram Pandit’s $15 million pay package, but the Hermes move is significant in its own right. The UK investor has made itself a force to be reckoned with in Germany, having launched a proxy fight against Dax 30 company Infineon.
The Hermes move raises a broader question about US investor complacency. We’ve commented repeatedly on how mortgage bond investors are standing pat as the mortgage settlement explicitly will reverse the established creditor hierarchy and impose losses on first mortgage investors when second mortgages should be wiped out before that happens. Of course, the problem is that these “investors” are really agents, and can’t be bothered to expend the energy to fight for their clients.
Even though some major institutional investors, most notably Calpers, have take up the interventionist role in the US, they’ve become much tamer in recent years, perhaps because creeping corpocracy has become accepted as normal. The success of a firm like Hermes in punching above its weight should give US activists pause. There’s a lot of looting going on, and it might behoove them to take note of it.
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* Hermes is also a firm of good taste, since it supported NC in our fundraiser.
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You wrote “corpocracy”. I read “coprocracy”.
I 99% Spring group is planning a similar action on Wells Fargo. Today, I believe. I had a chance to talk with one of the lead organizers of the effort over the weekend. She said they would be going after CEO pay packages. I encouraged her to go after CEO firings, since somebody needs to hold the bankster C-levels accountable. When I told her about the recent Louisiana District Court ruling regarding Wells’ “reprehensible” systemic abuses in its mortgage servicing, her jaw dropped. I don’t think she actually knew how bad it was. She’d never heard of Bill Black (sigh…)
Hermes should be applauded. And it’s been an activist, SRI kind of investor for a long time now.
That being said, I don’t think it’s fair to say the US institutional investor community (read: public pension funds, and NOT other institutionals, like hedge funds and the like) have been quite active over the 2011-12 proxy season when it comes to “say on pay.” Though, unfortunately, such say-on-pay resolutions, under Dodd-Frank, are merely a “non-binding” opportunity for investors to express their disapproval.
But overall, it’s important to remember the structural and legal contraints preventing meaningful shareholder activism. New federal rulemaking under the SEC has made it harder – or nigh impossible – for shareholders to propose new corporate bylaws providing for BINDING say-on-pay — they can’t even get their proposals up for a shareholder vote at annual corporate meetings. We have SCOTUS and the wall street lobby to thank for that.
Moreover, as you mention – most “shareholders” are merely agents – or agents of agents of agents – managing money for a diverse public. It’s darned hard to get them to get off their rears to be activist. Perhaps we ought to subject them to popular vote. After all, they do serve “public” functions – at least from the viewpoint of their beneficiaries.
Be warned, though. Once you start electing fund managers, beneficiaries might start doing “crazy” thinks like demand their investment dollars be used to sway, egads, corporate policy on labor and environmental issues. Which – in certain circles (the kind that don’t read this blog) is anathema to “free” capital markets (where the only thing that should count is increasing stock prices and corporate profits)
Furthermore, the way many institutionals are managed, the folks interested in “corporate governance” matters (like executive pay” aren’t the same folks who make investment decisions. And they don’t really talk to each other. Fund managers are mostly paid by volume of their portfolios, not results, and certainly not by achieving success as an “activist” shareholder. In fact, one might argue that the largest driving force behind SH activism in the US is the plaintiffs’ bar, who round up funds to participate in securities fraud and derivative lawsuits.
Lastly, many instituionals make use of proxy advisory firms (like RiskMetrics) that, ideally, serve to overcome the freerider problem of shareholder activism, viz, it takes a lot of effort to monitor companies and execs when you only own 5%, you invest in a lot of companies, and no one’s helping you out. So these firms will do the monitoring for you, and tell you what bylaws and resolutions shareholders ought to vote “yes” for. The problem here is that the proxy advisory firms – like credit ratings agencies – have been accused of letting corporations game the system, giving them how-to sheets to get positive ratings.
Bottom line. I would love to see our unions start polling their members as to what THEY’D like them to do with their investment dollars. Certainly, there’s federal law to deal with (ERISA, etc., constrains union fund managers as to what they can and can’t do with workers’ money). But that’s no reason we can’t have regular folks throwing their VERY weightly finnacial leverage around the boardroom.
But, even though these shareholder votes express “owner dissatisfaction” with how their businesses are being run…they aren’t necessarily binding. Its not just that corporate mangement aren’t responsive to shareholder interests…neither are the boards of directors (the one’s who actually are supposed to look our for the shareholders).
That’s where the real power is…to really make a difference, to make companies responsible to their shareholders and their customers…the Klepotratic elites controlling the upper echelons of power must be defeated.