Shell-shocked shareholders finally rebel over bonuses

The behaviour of Shell's remuneration committee was outrageous
    • The Guardian,
    • Jump to comments ()

The behaviour of Shell's remuneration committee was outrageous. The rules said bonuses for executives would be due if Shell came third or better in a league of five oil majors ranked by total shareholder return. But Shell finished fourth, prompting the non-executives to declare that the race was so close that fourth was as good as third.

That decision was so brazen that a shareholder rebellion was guaranteed. Even so, it was a shock yesterday to see the rebels secure a 59% majority. Have investors finally decided to get serious about excessive boardroom rewards?

There are signs. Votes cast against remuneration reports are set to reach a record high this year, according to Manifest, a proxy-voting agency. Cases like Shell's - where the remuneration committee pleads "discretion" to justify its action - provoke the most anger.

Discretion has become a licence to ignore the expressed wishes of shareholders. So what if a few more pennies on Shell's share price would have elevated the company into third place? Bad luck is part of life and when, like Shell's chief executive, Jeroen van der Veer, you're paid a basic salary of €1.93m and a short-term bonus €3.75m, the loss of a couple more million is not a reason to grumble. In any case, third out of five is no triumph: shareholders were foolish in the first place to approve a scheme that rewarded mediocre results.

That fact, one suspects, partly explains the sudden outbreak of rebellion. Investors are finally realising that the wool has been pulled over their eyes for years. Stockmarkets are back where they were a decade ago but boardroom pay has gone to the moon.

In this case, Shell moved the goalposts. But in other cases, the goalposts were simply set in the wrong place, with shareholders' approval. Directors have been incentivised to pursue short-term financial targets with the predictable consequence that long-term risks were ignored - the banks are just one example.

What's the solution? It's not easy, but two improvements seem to be essential. The hard one is to create a better definition of "performance" - more incentives tied to non-financial targets would be a good place to start. The easier one is to make votes on remuneration reports binding, rather than advisory. In other words, bonuses would be paid only after shareholders have given their consent - then investors might get somewhere.

The wars of Rose's

Sir Stuart Rose says cutting Marks & Spencer's dividend by a third is an act of "common sense". He is probably right but his shareholders are also entitled to feel uncommonly annoyed. If they look at yesterday's cashflow statement they will see that M&S has spent almost £600m in the past couple of years buying back its own shares. On average, it paid 439p apiece - rather more than yesterday's share price of 310p.

M&S is not alone in embarrassing itself by buying back equity at the top of the market - there are plenty of more egregious examples elsewhere. Nor is there any guarantee that the dividend could have been saved if a few hundred million quid had been squirrelled away. But Rose's talk yesterday about "core values" established over 125 years, jarred horribly: once upon a time cutting the dividend was considered a hanging offence at M&S.

The invocation of history was meant to remind us that the roof rarely falls in on M&S. It's true, but the maintenance bills can still be painful. Having embarked on a capital expenditure spree when he returned to M&S five years ago, Rose is now sanctioning a mini-spree under the slogan "doing the right thing".

An alternative title would be "waking up to the internet". M&S's overall market share in clothing is 11.2% but its slice of the online pie only 5.3%. Given that fashion is (and will continue to be) one of the fastest-growing areas of internet activity, it's crucial M&S makes a virtue of arriving late at the party.

That's for the medium term. The short-term picture is another year of toil. Rose is "cautious". So he should be: gross margins fell last year but the big squeeze starts now as M&S, like most UK retailers, starts importing goods after a 25% depreciation in the value of sterling. Shoppers in the UK appear, so far, to be a resilient bunch but they are unlikely to tolerate price increases.

The result, says the City, is that M&S pre-tax profits, having fallen from £1bn to £604m last year, will sink to £480m-£500m this time. If that proves to be the bottom, Rose can breathe a sigh of relief and address the serious business of appointing a successor. Yet another potential candidate, Carl Leaver, was lost overboard yesterday. Ian Dyson, the man in charge of doing the right thing, now appears to be front-runner. But, as M&S shareholders have discovered, you can't rely on anything these days.

Today's best video

Today in pictures

More from Viewpoint column