Some of the world’s largest fund managers have been accused of nodding through excessive pay packages, according to research from As You Sow – though some dispute the data.
The California-based non-profit has published a list of what it says are the 100 most overpaid chief executives from the S&P 500 last year. It compiled the list by comparing remuneration with total shareholder return and then looked at votes against those packages.
The report, titled The 100 most overpaid CEOs 2019: Are fund managers asleep at the wheel? names Ronald Clarke of FLEETCOR Technologies at the top of the list, followed by Mark Hurd and Safra Catz at Oracle and Hock Tan from Broadcom in third place. And despite public outcry over excessive pay – and the introduction of new rules requiring companies to publish the ratio of their CEO’s pay to that of their median worker – As You Sow says chief executive pay in the S&P 500 continues to rise: data from Institutional Shareholder Services (ISS), published by As You Sow, shows the average pay for a CEO in the S&P 500 grew from $11.5 mn in 2013 to $13.6 mn in 2017, while the Financial Times notes that ‘the average S&P 500 company boss is paid 361 times more than [the firm’s] median worker’.
Voting down CEO pay
As well as listing the CEOs it deems most overpaid, As You Sow looks at the voting habits of some of the world’s biggest fund managers in relation to these ‘excessive’ pay packets.
As You Sow says Fidelity voted against just 7 percent of the top 100 pay packages and AXA Investment Management (AXA IM) voted against 9 percent – a figure the fund manager disputes. As You Sow says BlackRock against 11 percent, Vanguard against 14 percent and State Street Global Advisors (SSGA) against 15 percent. Northern Trust, which mainly serves pension funds, did not vote against any of the 100 pay deals, according to the report.
‘There are significant errors in the data used for AXA IM,’ a spokesperson tells IR Magazine. ‘Our records show we voted against 20 of the 100 companies highlighted in the As You Sow report – which would mean an opposition rate of 20 percent, not the 9 percent reported.’
Talking about AXA IM’s engagement and voting process, the spokesperson continues: ‘We actively engage with companies where we have concerns and will vote against companies where those concerns are not addressed after a period of engagement. Our starting position in relation to CEO pay in the US is to shift US companies away from the position where incentive pay is granted without any need to satisfy performance conditions. Our votes support those companies that have started to recognize the importance of performance-related pay within remuneration structure, and we vote against those that don’t.’
The fund manager adds that it ‘continues to review our voting practices in the US and other markets’.
Speaking to IR Magazine, SSGA says that while it does not want to comment on the findings, it points out that as well as voting against 15 percent of these 100 pay deals, it abstained from a further 6 percent – highlighting the fact that the data doesn’t cover abstentions.
While Fidelity and BlackRock did not respond to requests for comment, and Northern Trust declined to comment, Vanguard provided IR Magazine with this statement: ‘Vanguard focuses on a company’s executive compensation as it relates to performance. We believe that in order for a company’s board and management to drive sustainable long-term value for investors, executive compensation should incentivize long-term performance versus a company’s peers and competitors.
‘Where we believe executive compensation is misaligned with performance, we express these concerns to the board and management, and may, if necessary, vote against compensation packages.’
The findings come as fund managers increasingly turn a spotlight on governance issues, with BlackRock CEO Larry Fink recently stating that one of the fund manager’s engagement priorities would focus on pay deals that promote long-term goals. In his 2017 letter to fellow CEOs, Fink said BlackRock did ‘not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation’ – even as his own remuneration hit $27 mn.
But while the As You Sow report highlights low figures in voting down excessive pay from some of the largest fund managers, many others took a stronger position on such packages: Royal London Asset Management voted against 89 percent of the 100 most excessive pay packets, Allianz Global Investors voted against 78 percent, BNP Paribas against 69 percent and Schroders against 63 percent.
As You Sow also says that ‘over the past five years the number of funds that have markedly increased their level of opposition to S&P 500 CEO pay packages has grown’, noting that a number of funds with assets in excess of $100 bn have doubled the number of pay packages they vote against. It specifically mentions CalPERS, which has assets of more than $350 bn: As You Sow says the pension fund has increased the number of S&P 500 CEO pay packages it voted against by a factor of almost eight.
In fact, As You Sow notes that certain types of fund are more likely to vote against a pay package than others. ‘As in prior years, we note that pension funds give CEO pay packages more scrutiny and a greater level of opposition than financial manager-controlled funds,’ write the report authors. ‘Also, in general, European-based investment funds vote against CEO pay packages at a greater rate than US-based ones.’
‘Eight years into the say-on-pay era in the US, institutional investors have become increasingly sophisticated in their approach to executive pay,’ Marc Hodak, a partner with executive compensation and corporate governance consultant Farient Advisors, tells IR Magazine. ‘They are demanding better alignment of pay and performance, and largely getting it. When they aren’t, they are registering their disagreement, either informally in discussions with management, or through their proxy votes. And companies are responding to their investor critics in the form of better shareholder engagement – or else.
‘The harshest critics of CEO pay may not agree with the evolving verdict of US institutional investors but the voting of those shareholders is the result of an increasingly engaged and active investment community, and one that is not shy about pushing back when it feels it is necessary.’
The influence of proxy advisers
The report also looks into the influence of proxy advisers – most notably the two largest, ISS and Glass Lewis. ‘In 2018, lobbyists for big business attacked these firms suggesting that fund managers were blindly following their advice,’ write the report authors, though their findings show that investors make their own decisions around executive pay. ‘It appears many funds that subscribe to ISS and Glass Lewis vote to approve numerous CEO pay packages that these advisory services advise to vote against.’
Citing a report from Proxy Insight, tracking the voting records and policies of more than 1,700 global investors and the recommendations of ISS and Glass Lewis, As You Sow says the research finds ‘a clear divergence in actual voting behavior compared to proxy adviser vote recommendations.’
Of the 100 most overpaid CEOs in the As You Sow report, ISS recommended voting against 33 percent – a figure the report authors say has been largely unchanged over the years – while Glass Lewis recommended against 27 percent, which As You Sow says is a drop on previous years.
Among some of the smaller though still influential advisers such as Egan Jones, Segal Marco and Pirc, recommendations to vote against the pay packages of these CEOs was much higher. Egan Jones recommended against 49 percent, Segal Marco – which As You Sow says ‘has one of the most rigorous analyses of CEO pay packages’ – recommended against 70 percent, and Pirc, which is one of the largest proxy advisers in Europe, recommended against 90 percent of these pay packages.