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Nest challenges companies over executive pay

Government-backed pension scheme the National Employment Savings Trust has set out plans to challenge the companies it invests in over executive pay, the appointment of auditors and the diversity of board membership.

Nest began accepting contributions from pension investors in July last year. It is eventually expected to become one of the largest institutional asset owners in the UK.

The pension scheme has today published a document detailing its approach to corporate governance and its voting policy.

Nest says the link between executive pay and performance remains unclear and argues the processes which have driven up salaries are “systemic”.

It says: “We believe that many of the processes driving the level of executive pay upward are systemic. 

“There is the interconnectedness of directors and companies, the use of board consultants with similar practices and similar advice, checklists of multiple parts to pay, and the use of relative reference points such as pay elsewhere. 

“These have created herd-like behaviour across companies. The causes that are now sounding alarm bells among directors and shareholders need to be urgently addressed, but voting alone is unlikely to bring about the change in culture many see as vital.”

In addition, Nest says it will vote against the re-election of the chair of a firm’s nomination committee if the company fails to disclose a target for the number of women it aims to have on the board and there is no indication of progress in electing women onto the board.

The scheme also wants to see greater competition in the market for auditors.

In February, the Competition Commission warned the audit market is “not serving shareholders” and remains dominated by a small number of large businesses.

Nest trustee member Sharon Darcy says: “We believe automatic enrolment heralds the start of a quiet shareholder revolution. Through their workplace pensions millions of UK workers will gain ownership stakes in companies across the UK and around the world. 

“We believe many of our members will have a keen interest in ensuring companies are profitable and sustainable for the long-term and by doing so provide increased security and prosperity for our members in retirement.”

Nest chief investment officer Mark Fawcett says: “The publication of our voting policy lets companies, fund managers and our members see what’s important to Nest and how we want to work with them for the future – which is collaboratively, constructively and to achieve great outcomes for our members. This voting policy is an important step to achieving our ambitions.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Am I missing something or isn’t it the prime purpose of these PC agony aunts to ensure that the firms in which they invest produce good profits, are likely to continue doing so and also pay a decent dividend. Is the rest really any of their business?

    For their benefit I think the following simple illustration may help them:

    Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.
    If they paid their bill the way we pay our taxes, it would go something like this:
    The first four men (the poorest) would pay nothing.
    The fifth would pay £1.
    The sixth would pay £3.
    The seventh would pay £7.
    The eighth would pay £12.
    The ninth would pay £18
    And the tenth man (the richest) would pay £59.
    So, that’s what they decided to do.
    The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly beer by £20.” Drinks for the ten men would now cost just £80.
    The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.
    So, the bar owner suggested that it would be fairer to reduce each man’s bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

    And so, the fifth man, like the first four, now paid nothing (a 100% saving).
    The sixth man now paid £2 instead of £3 (a 33% saving).
    The seventh man now paid £5 instead of £7 (a 28% saving).
    The eighth man now paid £9 instead of £12 (a 25% saving).
    The ninth man now paid £14 instead of £18 (a 22% saving).
    And the tenth man now paid £49 instead of £59 (a 16% saving).
    Each of the last six was better off than before with the first four continuing to drink for free.
    But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10”
    “Yes, that’s right,” exclaimed the fifth man. “I only saved £1 too. It’s unfair that he got ten times more benefit than me”
    “That’s true” shouted the seventh man. “Why should he get £10 back, when I only got £2? The wealthy get all the breaks”
    “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor” The nine men surrounded the tenth and beat him up.
    The next week the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important – they didn’t have enough money between all of them to pay for even half of the bill.
    And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

  2. @Harry Katz
    Not entirely sure that is 100% relevant but i was just talking to someone about that very explanation. Thanks for refreshing my memory.

  3. How about the Govt giving NEST members a vote on how much each of the NEST governing board members can earn?

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