UK Unveils Regulation Compelling Large Firms to Disclose, Explain Pay Ratios

UK Unveils Regulation Compelling Large Firms to Disclose, Explain Pay Ratios

Amid growing public and investor concern about major British companies potentially overpaying their top executives, the UK government has been kicking around the idea of instituting a pay ratio reporting rule since last year. The government hinted in April that it would propose the regulation soon, and now it is here. The proposal, which Business Secretary Greg Clark is presenting to Parliament today, will require all companies with more than 250 employees to disclose the ratio between the pay of their CEO and their average or median employee, as well as to explain this difference, the BBC reports:

The new rules, as well as introducing the publication of pay ratios, will also require listed companies to show what effect an increase in share prices will have on executive pay, in order to inform shareholders when voting on long-term incentive plans. … Mr Clark said: “Most of the UK’s largest companies get their business practices right, but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”

The plans were welcomed by the Investment Association – that represents UK investment managers – as well as business lobby group the CBI and think tank the High Pay Centre. Chris Cummings, chief executive of the Investment Association, said investors wanted greater director accountability and more transparency over executive remuneration.

That investors are leading the charge for transparency on executive compensation is unsurprising; activist investors were also key proponents of the pay ratio reporting rule that came into effect in the US earlier this year. Shareholders are voicing greater interest in exercising their “say on pay” prerogatives, particularly after recent scandals in the UK over executives receiving massive bonuses, in some cases without company performance justifying them.

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Google Investors and Employees Propose Tying Executive Compensation to Diversity Goals

Google Investors and Employees Propose Tying Executive Compensation to Diversity Goals

A group of Google employees has teamed up with activist investors in the tech giant’s parent company, Alphabet, to push a proposal at a June 6 shareholder meeting that would make executive compensation at Google contingent on the company meeting certain diversity goals, Kate Conger reported at Gizmodo last week. Alphabet opposes the resolution and has recommended a vote against it:

Google and Alphabet have maintained that they aren’t experiencing a diversity crisis but are rather dealing with complaints from a few disgruntled employees. A Google spokesperson declined to comment on the shareholder proposals, but the company also argued in its proxy statement that the proposal wouldn’t have any meaningful impact, even if it were approved, because Alphabet CEO Larry Page receives a base salary of only $1 per year and is not compensated based on performance.

But Zevin Asset Management, the investment firm that drafted the proposal, says that it’s intended to apply to all of the company’s executives, not just Page. “Anyone whose compensation is reviewed in the proxy, people like Sundar [Pichai, Google’s CEO], we are thinking about them, too,” said Pat Miguel Tomaino, the director of socially responsible investing at Zevin. “If this proposal gets a high vote and the board moves to implement it, we expect they would implement it for the people for whom it’s relevant.” In focusing its response solely on Page’s compensation, Alphabet is avoiding the bigger issues at stake, Tomaino added.

Although Google maintains that it is a leader in diversity and inclusion among Silicon Valley tech companies, it has faced scrutiny in the past year over its slow progress toward diversity goals and allegations of discriminating against women in pay and promotions. A pay equity audit demanded by another activist investor, Arjuna Capital, failed to satisfy Arjuna’s questions and compel it to withdraw a resolution demanding that the company report on the risks it faces from emerging public policies on gender pay equity.

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Will Pay Ratio Disclosures Tell Investors What They Want to Know?

Will Pay Ratio Disclosures Tell Investors What They Want to Know?

Public companies in the US recently began publishing the ratios between the pay of their CEO and that of their median employee in compliance with a regulation adopted by the Securities and Exchange Commission in 2015 that went into effect in the 2017 fiscal year. The regulation, prescribed by the 2010 Dodd-Frank financial reform legislation, had been a potential target for revision, or reversal by the Trump administration, but major institutional investors, particularly activist funds, pressured the SEC not to delay or discard the rule.

As the due date for disclosure approached, executives expressed anxiety about how to communicate these figures to their employees, as well as how the media and shareholders would react. With regard to employees, the concern was not so much that they would learn their CEO was earning an outrageously large salary, but more that half of them were about to learn that they earned less than the median employee and would want to know why.

So far, over 500 companies have published their disclosures, and according to an analysis last month by ISS Analytics, “the numbers have landed all over the map,” from 1.87 for Berkshire Hathaway CEO Warren Buffett, to 2,526 for Aptiv PLC’s Kevin Clark (the median ratio for S&P 500 companies was 166:1). The SEC rule requires companies to compare salary alone, so the ratios don’t account for what CEOs earn from capital gains and dividends.

Because of this limitation, David McCann recently commented at CFO, the rule isn’t as helpful to investors as it’s supposed to be, as it allows some companies to massively undercount how much money their CEOs really make. McCann points to the examples of the private equity firms Apollo Global Management, which reported that its CEO Leon Black was paid $250,888 last year, and Carlyle Group, whose founding co-CEOs David Rubenstein, William Conway, and Daniel D’Aniello each earned $281,315. These numbers are only slightly higher than the pay of the hedge funds’ median employees, but, McCann argues, they are also meaningless:

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Disney Shareholders Push Back on Board’s Executive Compensation Plan

Disney Shareholders Push Back on Board’s Executive Compensation Plan

Bob Iger, the CEO of the Walt Disney Company, received a total compensation of $36.3 million in fiscal year 2017, if all goes well, could earn more than twice that figure this year. The company’s investors, however, have balked at the board’s plan to reward Iger so generously, voting 52–44 percent against a non-binding advisory resolution approving Disney’s executive compensation pan at its annual shareholder meeting, Bloomberg reports.

Three proxy advisors had urged investors to reject the plan, which they said was misaligned with performance, but the board insists that Iger’s compensation package is worth making sure he remains on board through the completion of Disney’s ongoing $52.4 billion deal to purchase 21st Century Fox:

“The board decided it was imperative that Bob Iger remain as chairman and CEO through 2021 to provide the vision and proven leadership required to successfully complete and integrate the largest, most complex acquisition in the company’s history,” Aylwin Lewis, head of the Disney board’s compensation committee, said Thursday.

Bloomberg notes that this is the first time Disney shareholders have pushed back on an executive compensation package since federal regulators began encouraging these “say on pay” votes in the 2010 Dodd-Frank Act. Indeed, such rejections are still a rare occurrence in corporate America generally. Just 1.2 percent of S&P 500 companies had their advisory pay resolutions opposed by a majority of investors in 2017, Reuters reports, citing data from ISS Analytics.

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Social, Environmental, and Diversity Issues Dominate US Shareholder Proposal Filings

Social, Environmental, and Diversity Issues Dominate US Shareholder Proposal Filings

At the Harvard Law School Forum on Corporate Governance and Financial Regulation, Institutional Shareholder Services Executive Director Subodh Mishra recently published a summary of an ISS analysis of 450 proposals filed at Russell 3000 companies, which shows how investors’ priorities are shifting toward social, political, and environmental concerns. More than two thirds of these proposals are related to social or environmental issues, chief among them political activity and spending, board and workplace diversity, and climate change and sustainability, Mishra writes. Furthermore, nine of the ten most common types of proposals related to one of these issues, whereas only one (demanding the right to call a special shareholder meeting) is focused on governance. Mishra sees two main factors driving this trend:

First, social and environmental issues themselves are gaining significant traction with investors and the public. Important issues, such as concerns about the transparency of the political process, harassment and equity in the workplace, and climate change risks make headlines and dominate the public discussion daily. At the same time, investors and asset owners are bolstering their efforts towards greater ESG integration, which helps proponents gain further momentum. Second, governance topics may be lower on the agenda for the target universe. Shareholder proposals are typically filed at large-capitalization companies, where many formerly-contested governance issues have now become the standard. Annual director elections, majority vote standard, simple majority vote requirements and even proxy access—to a large extent—are now the norm for the vast majority of large companies.

ISS’s analysis counts proposals related to diversity and inclusion toward its total of “social issue” resolutions; while that’s fair, investors are paying more attention to diversity not only out of a sense of social responsibility but also as part of the investor community’s growing concern with talent as a key driver of business value.

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Activist Investors Push for Equal Parental Leave for Starbucks Store Employees

Activist Investors Push for Equal Parental Leave for Starbucks Store Employees

Starbucks has a reputation for taking good care of its store employees (or “partners” as it likes to call them), but it has nonetheless drawn some controversy this year regarding its paid parental leave program. Under a new policy announced earlier this year, new mothers who work at the coffee chain’s corporate offices are entitled to as much as 18 weeks of leave at full pay after giving birth, while fathers and adoptive parents get 12 weeks. Store employees working more than 20 hours a week and who have been with the company more than 90 days are allowed six weeks of paid medical leave upon giving birth, while those who adopt are eligible for a six-week adoption allowance, both at 100 percent of their average weekly pay.

Even though these benefits are much better than what most hourly retail and service employees in the US enjoy, the policy raised questions about why corporate employees were entitled to so much more. In August, the Guardian’s Molly Redden highlighted the impact of this disparity on store employees, noting that Starbucks is not alone among major US companies in offering more generous parental leave benefits to their corporate employees than to their front-line staff. Now, Redden reports, a group of investors led by Zevin Asset Management is pressuring Starbucks to tell its shareholders whether this discrepancy might constitute employment discrimination:

“Paid family leave is a huge factor in how well women can stay involved in the workforce after having a baby, or how much time out they have to take in their careers,” said Pat Tomaino, Zevin’s associate director of socially responsible investing. “Women and their families benefit from equal and generous paid family leave – but companies do too.”

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Private Equity, an Employer of Millions, Turns Its Attention to Talent

Private Equity, an Employer of Millions, Turns Its Attention to Talent

As investors become more aware of how talent drives value at a company, they are looking for ways to measure that impact and demanding more information about talent issues from the companies in which they invest. But investors won’t always wait for companies to crack the code connecting talent to performance; some are going ahead with this themselves.

Take private equity firms for example.

If asked who the biggest private sector employers are in America today, many would think of companies such as Walmart, Amazon, or General Electric. Not according to Michael Milken, chairman of the Milken Institute. In a speech he delivered recently at the annual conference that bears his name, the Financial Times’ Gillian Tett reported, Milken produced a list of America’s top 10 private sector employers, as calculated by the institute. Walmart indeed tops this list, but the next eight largest employers, according to Milken’s data, are private equity (PE) firms. And while Milken refrained from identifying these entities, it is not hard to guess who they might be, as Tett explains:

Carlyle and KKR, for example, are each estimated to employ about 700,000 people through their portfolio companies, which probably ranks them just below Walmart. Blackstone has “around 600,000” employees, as Steve Schwarzman, its founder, told the Milken event. Apollo, another private equity group, has 300,000 workers in its portfolio companies, while Warburg Pincus, General Atlantic, and TPG are only slightly smaller. Lobbying groups estimate that private equity firms now employ 11 million people throughout the US (the data are not very transparent).

Over the past decade or so, PE firms have become more like conglomerates. In the traditional model, private equity makes money by boosting the value of portfolio companies, then selling them at a much higher price, but according to research by the RBL Group, many PE firms are increasingly pursuing a “buy and transform” model. In this model, RBL’s Dave Ulrich and Justin Allen explain at the Harvard Business Review, PE funds must behave more like employers and pay more attention to talent and leadership. This has led to the emergence of leadership capital partners (LCPs), who are responsible for ensuring that both the firm itself and its myriad of portfolio companies have the right talent, culture, and leadership. According to RBL, over half of PE firms now have an executive with the responsibilities of an LCP:

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