Companies and shareholders at odds over CEO role

Shareholders could have new grounds for concern, according to a recent Hedley May survey, which finds that UK investors and company heads hold differing opinions on a number of fundamental issues surrounding CEO performance and remuneration.

Though 90 percent of executives believe – almost half of those ‘strongly’ – that ‘market-competitive’ pay is necessary to attract, retain and motivate the best possible leaders, almost 70 percent of shareholders disagree.

What’s more, only a third of shareholders feel a CEO’s role is critical and has become harder in recent years, compared with the majority of directors (seven in 10).

‘Remuneration is an emotive issue [that enables] shareholders to make their point,’ one FTSE 100 director is reported as saying. ‘When shareholders are winning they’re much more tolerant. The irony is that you have to work harder when it is tougher but you get paid less. The best way to act like a shareholder is to be one.’

Deborah Warburton, a partner at Hedley May, says the findings show ‘there are areas with a big divergence between what companies think and what shareholders think.’

Executives, non-executive directors and investors do agree on four key issues, however: the importance of performance-based pay; business performance should be the primary factor in executive pay; any rewards should focus bosses on the long-term success of their companies; and executive pay arrangements need simplification.

Most also agree there is little risk of a shift to private equity resulting from an increased scrutiny surrounding pay and directors’ reputational risk. Investors and directors alike further point to shareholder engagement as an area in which there is considerable room for improvement from all parties, with most suggesting there is a greater risk of future shareholder revolts than companies realize.

Shareholders articulate a need for high-quality dialogue – supported in advance by robust briefings materials – that is not exclusively focused on pay. Companies, too, suggest many shareholders are not properly equipped for new, intensive modes of engagement; many investors agree.

‘Both sides are dissatisfied with shareholder engagement,’ says Warburton. ‘Shareholders are saying they don’t want to talk just about pay, but also about strategy. Yet companies say it can be much more difficult to get shareholder attention unless they are in the highest reaches of the FTSE 100 to which institutional shareholders will devote their time.’

The effectiveness of succession planning proves contentious, too – shareholders are largely very critical of companies, while more than half of human resource directors acknowledge that they could improve. Only 57 percent of directors believe there are multiple candidates for future CEOs among their current colleagues.

The survey collected opinions from 140 FTSE 100 and FTSE 250 executives, as well as those of 15 of the world’s biggest institutional shareholders. For a wider perspective, the report’s authors also invited the UK’s Trades Union Congress to share its opinions.