‘Shareholder spring’ lands in Ireland as resistance grows to bumper pay days

Shareholder groups increasingly active in opposing higher pay at Irish PLCs

The 50 or so shareholders gathered at Kingspan’s annual general meeting in Ballsbridge in Dublin on Thursday had good reason to be cheerful.

While shares in the insulation group were heavily dumped after the Brexit referendum last June, they have since recovered the lost ground. And then some.

Less than three decades after the company floated in Dublin with an initial market capitalisation of IR£20 million (€25.4 million), it reached an all-time high of €5.68 billion this week. That’s up 75 per cent from its lows of last year and 27 per cent above where the group was valued even before the UK vote.

UK sales, which account for more than a quarter of group revenues, rose 14 per cent last year, excluding the impact of sterling weakness against the euro, as the group saw no impact from Brexit in the second half.


Group trading profit expanded by 33 per cent to a record €341 million last year and continues to rise, even though the company said on Thursday that UK activity has been “a little softer” in 2017.

"I would like to compliment you and the board for the excellent production of your report and accounts," Henry Irvine, one of only two shareholders to speak at the meeting, told chairman Eugene Murtagh. "It epitomises the excellent behaviour of the company."

Behind the scenes, however, some of the group's biggest shareholders had taken a more critical view of a key item on the agm's agenda: the company's share bonus plan. Over 25 per cent of investors who voted by proxy before the agm rejected the resolution. It followed on from a recommendation from a leading proxy advisory firm, Institutional Shareholder Services (ISS), to reject the programme, as it will be too easy for management, including chief executive officer Gene Murtagh, to be awarded new stock.

Payment thresholds

While the Kingspan new performance share plan plan is along the same lines as its existing programme, which expires next year, ISS said in a report for clients that investors had become more demanding in terms of how executives are rewarded for hitting minimum payment thresholds.

“Investor sentiment around reward and payout for threshold or median performance has moved on significantly from when the performance share plan was first introduced in 2008,” ISS said.

Welcome to the so-called “shareholder spring”, a phenomenon that began in the US and UK in 2012 when shareholders began to revolt against high executive pay deals – which has arrived here belatedly.

Five years ago, shareholder ire in the UK over remuneration claimed the scalps of the heads of insurer Aviva, drugmaker AstraZeneca and newspaper publisher Trinity Mirror.

While there have been no such headlines on this side of the Irish Sea, the past 12 months have seen sizeable votes against pay plans of companies from building materials giant CRH to sandwich maker Greencore and ferries operator Irish Continental Group (ICG).

"There's no reason to think that Irish companies would be the exception against the backdrop of what's been happening in recent years across Europe and the US," said Gerard Moore, head of equity research at Investec in Dublin. "It's taking place against broader concerns internationally about widening income and wealth gaps."

The debate is also occurring against a political backdrop of mounting antipathy towards the political elite in the west, according to Moore. Anti-establishment sentiment contributed to the Brexit vote last year, Donald Trump's election as US president and the ability of far-right French politician Marine Le Pen to make it to a run-off vote in the country's presidential election next month.

Package doubled

“The pay issue isn’t going to go away any time soon,” said Moore.

Discontent is not necessarily about the size of pay packages. CRH’s remuneration report for last year, where chief executive Albert Manifold’s saw his package almost double to €10 million, was passed by shareholders at the company’s annual general meeting in Dún Laoghaire on Thursday. Dissenting votes, at 18 per cent, were less half the rate that went against the company’s new pay policy when it was unveiled last year.

Twelve months ago, 40 per cent of voting shareholders objected to CRH’s move to raise Manifold’s maximum stock and cash bonus payment to 590 per cent of his salary from 400 per cent previously.

However, the 85 per cent surge in the chief executive’s compensation package last year was driven by a €4.8 million share bonus tied to awards made three years ago.

“The business has done very well and, in a situation where shareholders do very well, I do very well,” Manifold told reporters after the agm on Thursday.

Still, the chairman of CRH’s remuneration committee, Don McGovern, took heed of the level of disapproval at last year’s meeting and committed in the latest annual report to adding a further protection for shareholders by carefully considering the return on net assets of the business when awarding stock bonuses under the new programme.

“We believe shareholders can be reasonably satisfied with the committee’s response in this regard, and do not believe further action is warranted at this time,” Glass Lewis, another leading proxy advisory firm, advised clients before the vote.

Meanwhile, CRH has caved in to pressure to outline performance targets tied to its short-term bonus scheme from next year, even though they have been deemed commercially sensitive until now.

Proxy votes

Shareholder dissent has achieved even more impact elsewhere. ICG said in its annual report, published earlier this month, that it went back to the drawing board after more than 31 per cent of proxy votes at last year’s agm rejected the company’s remuneration report.

The company decided to defer any awards under its 2009 share options plan for 2016 as it went about changing its share bonus programme, which will be put before shareholders next month. The new scheme would cap the annual bonus and performance share plan awards of Eamonn Rothwell, chief executive for the past 25 years, each at 200 per cent of his base salary. It would also tie up at least half of annual executive bonuses by "restricted" shares that couldn't be sold for five years.

Rothwell’s remuneration amounted to €2.3 million last year, including €1.8 billion in restricted shares.

Meanwhile, Greencore's chairman Gary Kennedy indicated in January that the group will re-engage with investors on the remuneration of chief executive Patrick Coveney, after 40 per cent or voting shareholders rejected the convenience food group's move to double the maximum long-term share bonus he is entitled to.

It is understood that many of the objectors were among new investors that backed a £439.4 million (€514.7 million) Greencore share sale in December to partly fund the group's purchase of Peacock Foods in the US.

UK companies are legally required to hold binding votes on remuneration policy at least once every three years, or within a year of a non-binding or advisory vote not being passed at an agm. However, Irish companies aren’t subject to the same demands.

“The Irish votes on remuneration may be non-binding, but companies are beginning to learn from the experience elsewhere not to ignore investor sentiment,” said a Dublin-based fund manager, who declined to be identified.

Tullow Oil's agm on Wednesday saw almost 16 per cent of investors vote against the group's remuneration package, which will see outgoing chief executive Aidan Heavey, who handed over the reins this week to company veteran Paul McDade, stay on his chief executive pay and perks package for six months as he assumes the role of group chairman.

Corporate governance

As pay dominates the agenda, wider corporate governance issues seem to take second billing.

Heavey’s elevation from chief executive to chairman in the first place – for up to two years – was only rejected by 8 per cent of investors at the agm, even though it goes against the UK Financial Reporting Council’s code. Tullow’s defence lies in the fact that its business is based on relationships, particularly with investors and partners in Africa, who want an orderly turnover at the helm.

Some of the biggest shareholders in the world have become more exercised in recent months about excessive boardroom pay. Blackrock, the world’s largest asset manager, wrote to the boards of companies in the FTSE 350 index earlier this year, saying that it would only approve salary increases for top executives if workers’ salaries rise at the same pace.

Amra Balic, head of the European investment stewardship team at Blackrock, which had $5.1 trillion of assets under management at the end of December, said in the letter that top managers’ pay “should be strongly linked to performance, by which we mean strong and sustainable returns over the long term, as opposed to short-term hikes in share prices”.

Meanwhile, oil-rich Norway’s $915 billion sovereign wealth fund, the world’s biggest, plans to get more active on the say-on-pay front and will look to use its voting power next year.

"Investors are increasingly concerned that remuneration practices do not work as intended," Norges Bank Investment Management said in a report published earlier this month. "It is not clear that equity-based remuneration has achieved satisfactory alignment of CEO interest with those of shareholders."

“The public has at the same time become more critical of executive remuneration, especially in the aftermath of the 2008 financial crisis. Executive pay has also been drawn into the wider debate on income inequality.”

Part of Norge’s solution would see a “substantial portion” of chief executive’s pay locked in for up to 10 years.

“Remuneration would be less valuable on paper, but the exposure to the long-term success of the company in the stock market would be less ambiguous,” it said.

Lottery-sized pay

The shareholder spring started off earlier in the decade amid political and public uproar at the fact that global banks continued to give executives lottery-sized pay awards after the financial crisis, according to David Holohan, chief investment officer at Merrion Capital in Dublin.

Banks remain in the spotlight. Credit Suisse, which this week unveiled plans to raise four billion Swiss francs (€3.7 billion) to bolster its balance sheet, faces into a difficult shareholders meeting on Friday.

Group chief executive Tidjane Thiam and other top executives agreed earlier this month to slash by 40 per cent their planned 78 million Swiss franc bonuses, following massive criticism from proxy advisory firms. Thiam conceded that the awards hadn't "appropriately reflected" the impact of Credit Suisse entering a $5.3 billion agreement last year with US authorities to settle claims it misled investors in mortgage securities sold before the 2008 financial crisis.

But Glass Lewis, for one, hasn’t been mollified and continues to urge shareholders to vote against the top-brass pay plan at the bank, whose stock fell 33 per cent last year as market turmoil, surprise trading losses and the US mortgages case settlement hit market confidence.

Closer to home, though, Glass Lewis is among parties that have been arguing that performance-based bonuses should be reintroduced in Irish banks, where such schemes have been halted since 2008 amid a clampdown on pay at bailed-out lenders.

In a report before Bank of Ireland’s agm on Friday, the advisory firm said: “We generally believe that a majority of compensation should be performance-based so as to promote alignment between executives and shareholders’ interest.”

External candidate

Still, Glass Lewis said it "recognises" why bonuses were scrapped as part of the bank's government rescue. Bonuses remain off the agenda for banks in Ireland as Bank of Ireland searches for a new chief executive to replace Richie Boucher, who plans to retire later this year.

While Boucher's pay has been above the €500,000 State-imposed pay cap for bank chief executives since he was appointed in 2009, Minister for Finance Michael Noonan – who holds the State's 14 per cent stake in the bank – has made it clear that only an external candidate would be able to command a package before the limit.

Back at Kingspan’s agm, Gene Murtagh, whose total pay package increased by 9 per cent last year to €1.915 million, is unapologetic.

“If you look back, in essence, we’ve knocked it out of the park year after year,” he told reporters following the meeting. “I’m surprised by the amount of focus [the new incentive scheme] is getting – for a business that’s performed so well over the past 10 years.”

He said the plan is designed to incentivise and reward over 300 managers and key employees to drive the company’s returns to shareholders.

“Naturally the focus will come on to me, but it’s for the wider team.”

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times