Until recently, most CEOs subscribed to the philosophy that a corporation exists principally to serve its shareholders. That changed in August 2019, when the Business Roundtable, a US business group, issued a new statement declaring that a company exists ‘for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders’.
This rejection of shareholder primacy has triggered heated debate. Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co and Chairman of the Business Roundtable, announced, “The American dream is alive, but fraying”.
While the statement is certainly a positive step forward, the Roundtable’s commitment is far from ground-breaking. For example, a similar requirement has been enshrined in UK law since the Companies Act of 2006. Directors must promote the success of the company, while having regard to its long-term impacts, including on employees, customers, suppliers, the environment, and local communities.
Perhaps more worryingly, the Business Roundtable statement may be a red herring. While we agree that we require a more balanced set of objectives for companies (which underpins our stewardship approach to investing), the greater problem with the market today is not shareholder primacy, but arguably a lack of executive accountability to the underlying shareholders, ordinary savers and pensioners.
Why shareholder accountability matters
We live in a world of vast economic inequality. According to the World Inequality Report, since 1980, income inequality has increased rapidly, especially in North America, China, India and Russia. In the US, the top 10% earners now account for 47% of the national income. Elsewhere, for example in the poorest parts of Africa, 41% of the population survive on less than $1.25 a day. Net private wealth for the few has risen, yet net government wealth has declined in all regions, severely hampering governmental ability to mitigate income inequality.
Shareholders have a variety of tools at their disposal to help address this inequality. Yet, too often, those delegated the responsibility to exercise these rights on the underlying shareholders’ behalf – asset managers – don’t use these tools effectively.
A right but also a duty
Ownership of a stock confers important rights. Among them are the right to select the company’s leadership, approve major transactions, choose the auditor and vote on senior executives’ pay. These decisions can have a major impact not only on a company’s ability to deliver long-term value, but also on its ability to help mitigate inequality.
Consequently, ownership of a stock also bestows the responsibility to exercise these rights with due care and consideration. Against a backdrop of rising anger over inequality, one might think executive pay packages would be regularly thrown out. In fact, the results suggest a different story. Take JPMorgan’s CEO Jamie Dimon who is championing a broader stakeholder approach. His pay in 2018 was $31 million, and shareholders approved this, with 72% voting in favour. Since becoming CEO in 2005, he has taken home an astonishing $330 million.
CEO compensation is now so high that as of 2018, the CEO-to-typical worker ratio in the US is 278-to-1, up from 20-to-1 in 1965 and 58-to-1 in 1989. Between 1978 and 2018, CEO compensation increased by 1,008%, far outpacing market growth; in the same period, the S&P 500 index grew by 707% and the average US worker’s salary grew by a paltry 12%1.
Why is this happening?
One reason for the growing divide is that there is no real market pressure on CEO pay. Far too often asset managers just vote with management or in some cases do not vote at all. In 2018/19, according to Proxy Insight data, the overall percentage of votes against remuneration proposals was a mere 6% for FTSE 100 companies and 9% for S&P 500 companies.
Given popular consciousness around income inequality, the average investor might be surprised to find out that their asset manager has voted in support of some of these multi-million dollar pay packages.
When asset managers vote in favour of remuneration packages that reinforce economic inequality, are they keeping the benefits of customers, employees, suppliers and communities in mind? And, ultimately, is this in the interests of the underlying shareholder, given the critical importance of economic stability for long-term growth and earnings?
What can asset managers do to combat inequality?
Asset managers need to think harder about executive pay, and vote against packages that are excessive and poorly structured. At Sarasin & Partners we have long felt it important to take a stand on the level of executive pay alongside the structure of pay, which ensures alignment with long-term value creation. We also look to see clear disclosures around short-term bonuses, targets that are a sufficient stretch, and a fair approach to pension contributions, rather than one that gives significantly preferential treatment to senior executives.
In the 2018 proxy season alone, we voted against 48% of remuneration proposals, including at JPMorgan. We recognise the value that Jamie Dimon has brought to JPMorgan but we don’t believe it justifies the level of pay given.
Where we have had cause to vote against a company’s remuneration report over two or more consecutive years without seeing improvements, we typically also vote against the re-election of the Remuneration Committee Chair. A key part of holding the board to account is holding individual directors accountable for their area of responsibility.
Active ownership means active engagement
Voting against excessive remuneration is one way in which shareholders can help ensure executive pay does not exacerbate inequalities. Active engagement with companies to ensure their business practices consider societal impacts is another.
Take the clothing industry, which typically sources from very poor countries. When thinking about supply chains, it is important to understand how employees all along the chain are treated. We believe that our engagement with AB Foods, the owner of Primark, serves as an illustration of how asset managers can work with companies to encourage change.
We gained assurances that Primark is training procurement staff and suppliers to look out for and identify potential instances of forced labour within the supply chain. We were also pleased to see that Primark was an early signatory to the Bangladesh Accord, established after the Rana Plaza factory in Bangladesh collapsed in 2013. We continue to work with the company to understand progress, particularly in light of the potential closure of this Accord in the near future.
Another area of focus for us has been issues relating to the opioid crisis. Last year we engaged with AmerisourceBergen, a large US pharmaceutical distribution company, on their role in the crisis. Despite gaining some comfort that they were taking steps to allay any concerns over their behaviour, we ultimately decided to sell our holdings in the company due to ongoing uncertainty.
In the banking sector, we have undertaken several engagements that have dealt with customer mistreatment as well as bribery and corruption. Following revelations in late 2016 that Wells Fargo had created millions of fake accounts and aggressively cross-sold products to customers, for instance, we wrote to and met that Chair for one-on-one discussions. A key priority was ensuring an overhaul of the board that had overseen the aggressive sales culture and weak internal controls. Since then, the Chair has replaced all the longstanding directors and overseen a shake-up of senior executives and strengthening of internal controls. We continue to monitor the situation.
How can asset managers drive market-wide change?
Asset managers often have a powerful voice when it comes to company engagement, but can also build networks through joining industry collaborations to amplify overall impact. In the end, rising inequality is a systemic problem that demands a broad-based policy response. Governments naturally take the lead, but asset managers can play a contributory role. Ultimately, we all have an interest in promoting a stable society as this underpins sustainable economic growth.
When it comes to inequality, we have supported a range of initiatives from sector-specific actions like the Investor Mining & Tailings Safety Initiative2 to the Workforce Disclosure Initiative3, a broader effort to drive more transparency from companies on how they manage workers. The latter is vital in ensuring investors have the information to underpin engagements aimed at improving workforce treatment.
The impact of company activities on the community and on health is also high on our agenda, for example the impact of plastics pollution. We have endorsed the Ellen MacArthur Foundation’s New Plastics Economy Global Commitment4, which aims to tackle the growing problem of plastic packaging. We recently published our own Climate Pledge to ensure we are not exacerbating human suffering that arises from climate change.
The collective failure of asset owners and managers to properly monitor and hold executives to account is a major weakness with capital markets. When it comes to inequality, investors have an important role to play. Asset managers provide a critical link in the ownership chain, and have a responsibility to implement their votes and company oversight in a way that aligns with underlying shareholder interests. Executives will only be held to account when asset managers are.
1 Economic Policy Institute. Figures based on stock options valued at the point when they were cashed in