If you follow the news, it seems as though every few weeks there’s a story about a big corporate executive and their even bigger bonuses. These eye-watering pay packages seem to come rain or shine. Taking the recent example of BP, you might have heard about how they proposed a staggering £14million pay package to Chief Executive Officer (CEO) Bob Dudley. Now, while this amount of money is not far out from the norm for a top 100 company, how can it be that the CEO has been given a 20% pay rise when BP have performed so poorly? Last tax year BP had to cut around 7000 jobs and impose a pay freeze on lower level staff due to falling profits and overall poor performance. Let’s not also forget that BP reported a loss of over £3.5billion as its share price dropped by 13%.
It is no surprise then that this pay proposal was met by one of the biggest shareholder revolts in history with 59% of holders voting against it at the annual meeting. This shareholder vote is an example of corporate governance and is something many of the funds we advise on, use to ensure that companies they invest in are well managed and responsibly run.
Corporate governance is an approach used as part of both financial and ethical assessment of investee companies. The application of corporate governance policy reflects the power that you have as an investor. The objective of corporate governance being to help assess whether businesses are acting as responsible corporate citizens. This is usually achieved through focus on the three main ESG factors; environmental, social and governance. These factors include but are not limited to areas such as employee relations, gender diversity in the boardroom, environment reporting and, of course, executive remuneration policies.
The objectives of adopting a corporate governance approach are two fold – to minimize investment risk and create a positive impact by incentivising companies to maintain higher standards of practice. Taking the BP example, ESG research indicated that the firms had falling safety standards and poorer environmental reporting. On the back of this, the ‘smart money’ had already sold out of BP well before the Gulf of Mexico crisis due to ESG concerns. The theory of ESG being that a well run company will perform better and be less at risk of becoming the next BP.
If you are interested in further reading in this area we would recommend having a look at Eden Tree’s article on the same subject found at the following link - https://www.edentreeim.com/insight/articles-list/corporate-governance Eden Tree Investment Management often publish ‘insights’ in the world of ethical investment and we use their ethical funds.
Kames Capital, another investment manager with a range of ethical funds we use, have also released a short document on corporate governance specifically highlighting their use of voting as shareholders over the last quarter. You can download this as a pdf by following this link www.kamescapital.com/engage