The “Shareholder Spring” is upon us. No longer can top executive payouts happen without the scrutiny of an increasingly vigilant shareholder community. Two expat South Africans are right in the thick of this.
Last week it was widely reported in the UK media that Mick Davis, CEO of Xstrata, will receive a “retention” bonus of £28.8-million when the merger deal with Glencore is consummated.
This payment, the report in the Telegraph says, is simply to ensure that he will stay with the merged company for three years. The bonus is in addition to the payout of £71-m in March, as a final dividend for his 15.8% shareholding in Glencore.
He will, of course also earn his substantial regular salary and enjoy a wide range of benefits.
This is a little more than R1.3-billion paid to one man who has worked and benefited from corporate activity in one year.
The Telegraph report says “shareholders are incandescent about this” and the payment is said to threaten the entire Xstrata-Glencore deal. But the board’s decision to make the payment is defended by Ivan Glasenberg, the ex-South African billionaire CEO of Glencore who says: “We like people who work for us to be entrepreneurs. We like them to chase ideas. You want a good CEO? You are going to have to pay them.”
He points to the wealth Mick Davis has created for shareholders.
Further reported this week, Martin Sorrell of WPP, the second-highest paid FTSE100 CEO, was smacked by his shareholders, 59.5% of whom voted against his pay rise of 60% to £6.8-m. Sorrell is recognized as having created one of the world’s leading advertising groups, employing more than 160,000 people and operating in108 countries.
The big argument until now has been that business executives should only receive payouts in relation to the profits generated for their companies. This has been the defence of people like Mick Davis and Martin Sorrell.
But now there is a new mood emerging. Even when profits are substantial and CEOs clearly “deserve” the kind of payments we are talking about, shareholders object to the “obscene amounts” paid.
It is as if the mood of austerity and cost-cutting just cannot stomach trade unions on the one hand fighting for miniscule increases while the fat cats at the top appear to gorge themselves.
Closer to home, remember last year when the Sunday Times published its “rich list of wealth ownership and earnings” showing that Whitey Basson, CEO of Shoprite Checkers, took home R627.53-m in salary, perks and share options in 2010.He did this while fighting the unions for marginal increases to be paid to their low-paid membership.
The list also showed that Marius Kloppers, CEO of BHP Billiton, somewhat lower down the pay gradient was paid R77.53-m, a 43% pay rise from the previous year. Bernard Kantor, CEO of Investec, made R56.69-m.
While there was comment in the media on this issue, we did not see any large-scale uprising of shareholders at annual general meetings. At the time, Patrick Craven spokesman for Cosatu, simply said that, though South Africa is a rich country, we have the most unequal distribution of wealth.
Based on recent reports, however, shareholders are now beginning to find their voice. Complaints about executive compensation have already come a long way. The difference is now, with all the increased transparency, we are getting in to the “blood and guts” of it. Shareholders are not to be fobbed off anymore.
Last month, at the AGM of Absa, Theo Botha said the remuneration committee and its chairman, Brand Pretorius, appear not to be doing their job. Maria Ramos is paid a R14-m “short-term bonus” and he cannot find out what “the key performance indicators are to determine such a payment.”
Botha also queried the R15-m short-term bonus paid to Stephen van Coller in spite of the earnings from his division being 10% down.
In the public sector there has been a culture of greedy payouts, often to failed CEOs. Exiting CEOs like Khaya Ngqula of SAA, Jacob Maroga from Eskom, Dali Mpofu from the SABC, Alan Mukoki from the Land Bank all left with hefty payouts. Last year, Siyabonga Gama, who was fired and then re-hired at Transnet, received R10-m while he was suspended.
Two opposing trends are significant. The payouts have become more extravagant, and with increasing media revelations the shareholders are becoming more vociferous in their condemnation. It is not just the provocateurs like Theo Botha who are climbing in, it is the man-in-the-street investor who is now speaking up.
It is not so much the “salary” component of the compensation packages which is causing the ructions. It is the extraordinary bonuses that are more to blame. Whether it is for “retention” or “golden handshake” or a “negotiated exit” or a short-term whatever, it is these that stick in the shareholder’s craw.
I still believe that executive talent and great leadership skill will always fetch a top-end compensation package. Business is not becoming easier and the challenges are not diminishing. It is only the exceptional CEOs who will make it into the future.
Like all markets of rare and outstanding products, the economics of supply and demand will ensure that the prices to be paid for excellent leadership will increase.
It is clear, however, that a tipping point has been reached. In the past few months boards representing shareholders have voted down CEO compensation packages at Citibank, AstraZeneca, Aviva, Shell, UBS, and Barclays. There is more to come.
It has even been suggested in the US, in Europe and here that executive compensation ought to be regulated, that there should be some kind of “ceiling” to avoid what has been perceived as the “fat cats” over-reaching themselves.
It is noted, however, that there has not been any take-up of this suggested course of action. Better to leave the market forces and the shareholders to exercise their checks and balances with the media continuing to play its whistle-blowing role. DM