Activists have ramped up their attention on board and executive pay this year, using concerns surrounding remuneration from other investors to add to their arsenal in campaigns.
What is the trend?
The number of activist demands focusing on remuneration is on track to reach a record high in the U.S. this year. According to Activist Insight Online data, primary and partially-focused activists have already advanced 12 remuneration demands so far this year, the highest level during comparable periods since at least 2013, when records began. U.S. activists need to make just four additional remuneration demands by the end of 2021 to reach the record established in 2019.
In Europe, the trend has been in the making for the past few years. Excluding engagement focused activists, 39 companies were targeted with remuneration demands between 2018 and 2020, outpacing the number in the three years prior. So far this year, eight remuneration demands have been advanced by activists, excluding engagement focused funds. While this is lower than last year, remuneration has figured prominently in some campaigns, including in Petrus Advisers’ action at Aareal Bank and CIAM’s crusade at Scor.
Who is making it happen?
The increased scrutiny from activists on compensation is being seen across sectors, with activists alleging excessive pay to further their primary goals.
Carl Icahn’s CVR Energy, which led a failed board assault at Delek US Holdings earlier this year, made a books and records demand related to CEO Ezra Yemin’s pay, which the activist described as “exorbitant.”
Elsewhere, the investor group led by Macellum Capital at Kohl’s, which successfully settled for three board seats in April, said the board had failed to properly set executive compensation to reflect the company’s performance.
Ancora Advisors, part of the Kohl’s group, made a similar argument at Blucora, while Legion Partners has also raised concerns on compensation at OneSpan and Genesco. Oasis Management used compensation criticisms as part of its push for board seats at Stratus Properties.
There have been other notable campaigns outside of the U.S. CIAM launched a campaign against the re-election of French company Scor’s Chairman Denis Kessler and another two directors – Claude Tendil and Bruno Pfister, while Petrus Advisers successfully opposed the compensation resolution at Germany’s Aareal Bank.
Why is it happening?
The primary drivers for heightened attention on compensation is COVID-19, with many investors concerned that companies are not considering the impact of the pandemic on their balance sheets when calculating compensation. In addition, an increased focus from institutional shareholders on ESG issues in recent years has prompted activists to question compensation plans more vigorously.
Indeed, Kimmeridge Energy Management said in a white paper that “the pandemic once again exposed the unwillingness of boards to hold management teams accountable” on compensation. While share prices of oil companies have declined 60% between 2018 and 2020, executive compensation dropped just 1%, Kimmeridge noted.
There are similar views in Europe, where some activists are pushing for an improved alignment between compensation and performance following the COVID-19 pandemic. CIAM Deputy CEO Anne-Sophie d’Andlau told Activist Insight Online in an interview that “the focus has been on ensuring the alignment between a company’s performance and the remuneration of its top executives, so that management teams bear the weight of the crisis alongside shareholders.”
Carl Icahn’s CVR Energy alleged earlier this year that Delek did not provide details about compensation because it feared strong reactions from shareholders. CVR said telling “stockholders of a relatively small company that has not performed particularly well that its CEO’s average total compensation per year was over $10 million might have ignited an immediate stockholder rebellion.”
Asset managers have also played their part in the increased scrutiny on compensation. BlackRock said in its stewardship report that it has withheld support for 33% of say on pay proposals in Europe, the Middle East, and Africa, up from 26% last year. However, the investor has only withheld support for similar proposals in 5% of U.S. votes, a slight increase on the 4% from last year.
How sustainable is the trend
The pandemic will fade away and is unlikely to be a permanent reckoning for executive compensation. However, as ESG becomes more prominent, remuneration could continue to be a focal point for activists.
Indeed, d’Andlau said the growing investor focus on compensation is in line with the increasing importance of ESG among investors, large and small. “This trend will continue to be prominent as traditional shareholders increasingly take more responsibility and vote in line with their voting and ESG policies,” she said.