US picket lines put shareholders in the spotlight over pay

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Starting on Monday, comedy fans will once again queue up outside New York’s Ed Sullivan Theater and Rockefeller center to see the funny men of late night television perform. Since May 2, Stephen Colbert, Jimmy Fallon and Seth Meyers have been forced off air by the Hollywood writers strike, which ended this week.

As in most labour disputes, pay was a central grievance and writers were quick to contrast their packages with those of studio executives. Describing the rewards for Netflix’s top managers as “egregious”, the Writers Guild of America in May urged the streaming service’s shareholders to vote against executive pay at the company’s annual meeting.  

Netflix in 2022 paid its then co-chief executives Reed Hastings and Ted Sarandos more than $50mn each — a sum shareholders balked at even for these big-name media barons.

Netflix received the support of just 29 per cent of votes cast at the company’s annual meeting in June on the company’s pay policies, one of the lowest support levels among S&P 500 companies. This was the second year in a row that Netflix failed to win a majority of shareholders’ support for pay. And in 2021, Netflix eked out only 51 per cent support for its executives’ pay.

In this case, the concerns raised by shareholders did spur changes at Netflix after the 2022 vote: among them is a $3mn base salary cap for its co-CEOs and a requirement that they take 50 per cent of their remuneration in stock options. It has also introduced a vesting period for stock options to the co-CEOs and performance conditions to bonuses.

But in general, the non-binding “say-on-pay” votes in the US are more a symbolic signal with ambiguous impact. If shareholders really want to grab companies by the lapels, some corporate governance experts say they need to vote against board directors such as those on pay committees.

Notably Vanguard says its funds will generally vote against pay committee board members when the asset manager votes against say-on-pay in consecutive years, ie when the first vote does not produce enough change.

But more generally this does not happen often. This year, board directors on the remuneration committees at S&P 500 companies received an average support of 95 per cent of votes cast on their elections, in-line with previous years, according to ISS Corporate Solutions, a division of Institutional Shareholder Services.

That is roughly in line with the broader trend on shareholder votes on the election of directors. Among the biggest fund managers, Vanguard supported 92.6 per cent of all board directors at S&P 500 company meetings for the 12 months ending July 1 2023, according to Farient Advisors, a pay consultant. BlackRock supported 89 per cent of board directors over that time period, and State Street supported 85 per cent.

Adopted as part of the 2010 Dodd-Frank act, the requirement for a say-on-pay vote has drawn criticisms for lacking teeth. Anne Simpson, a former managing investment director at the biggest US public pension plan Calpers, has said these votes have largely failed to rein in executive pay in the US.

The US rules contrast with Australia’s 2011 say-on-pay regime that says if more than a quarter of shareholders vote against a company’s pay for two years in a row, all directors must face re-election.

If shareholders do not take action directly against directors, some corporate governance experts argue US executives might view that as permission to ask for more money. “That’s an implicit signal that those asset managers don’t focus on executive pay,” said George Georgiev, a professor at Emory University’s law school. That signal, he said, “can contribute both to higher pay levels and to pay-to-performance misalignments”.

Now that the writers’ strike is settled, the pay battle shifts to the car industry where striking workers are putting the spotlight on executive pay at Ford, General Motors and Stellantis.

Ultimately, many asset managers have little interest in being the arbiters for the broader US debate on income inequality. “They have been pretty clear and consistent that they are not out to set some sort of arbitrary salary limit,” said Rich Fields, head of the board effectiveness practice at Russell Reynolds, a consultancy. “In most circumstances they are not voting for or against the quantum of pay but on the linkage between pay and performance,” he said.

If labour strikes over pay continue to rise though, it is likely that not only executive pay will come under more scrutiny, but also the actions of shareholders on the issue.

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