The past few weeks have witnessed several instances where shareholders have rejected executive compensation packages proposed by bank boards. Is this the dawn of a new era in corporate governance?
Many years ago when I was Business Manager to the Global Head of Treasury at ABN AMRO, the unit submitted its bonus request for that year to the director responsible for the investment banking unit. When he saw the size of the request his acerbic response was; “so what about the shareholders”.
It would appear that shareholders around the world are now beginning to ask the same question. From one bank to the next shareholders are venting their displeasure at the size of executive compensation plans—forcing management to revise their payouts.
Recently, Citigroup has had its executive pay plans voted down by its shareholders while the shareholders of UBS revolted against management compensation as well as management actions. Barclays and Credit Suisse have also suffered shareholder revolts and Bank of America seems to be the next in line.
The question is what happens next? How far does this revolt go? Does it stop at the directors or does it cover other highly paid executives and employees further down the corporate hierarchy who in some cases actually earn more than the directors?
If this happens then management has to determine the most appropriate path to take—and they have two basic choices.
In the year at ABN AMRO referred to above we had to go back to the drawing board with the bonus pool and the big decision was whether or not to reduce individual allocations across the board, or, pay the “superstars” to the detriment and at the expense of everyone else. The latter alternative prevailed but it had a negative effect on staff morale and in the long run proved to be counterproductive.
The choice between the superstars and the rest is in effect a choice between banks building strong teams that provide stable results, or, rewarding individualism—a strategy that brings with it greater volatility of both risks and earnings. The current post financial crisis environment definitely favors the former.
The financial crisis has ensured that shareholders will now adopt a more interventionist approach to corporate governance and they have been emboldened by their latest moves—as well as the fact that the Dodd Frank Act specifically grants shareholders a say on executive pay. We can thus be sure that there will be future shareholder rebellions and interventions and that they won’t be limited to executive pay.
This will ultimately have implications for business focus, strategy and risk. It should make for very interesting times within the banking industry.
Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Use this link to give your opinion on the performance of banks post the financial crisis.