Enterprise and Regulatory Reform Bill

Memorandum submitted by Manifest Information Services Ltd and MM&K Ltd (ERR 11)


1 Introduction


Manifest is an independent proxy advisor which provides objective research and information services to institutional investors which enable them to make informed voting decisions at shareholder meetings.

Manifest was formed in 1995 and operates independently of any trade association or special interest group. It is an owner-managed business which employs 50 staff and is based in Essex. Manifest’s clients are mostly based in the UK but in addition we supply services to investors based in continental Europe and the USA. In total our clients have assets under management in the region of £3 trillion.

2 AGM r esolution a nalysis


Over 60% of Manifest’s workload is directed towards analysing what is collectively known as "say on pay" resolutions at annual general meetings i.e. those resolutions which impact directors’ pay. In particular these are the resolutions to introduce new share plans, which are binding votes, together with the current non-binding votes on policy. As part of our work we analyse executive pay in what would be best described as "granular detail". In addition to our work as a proxy advisor we also an authoritative report on the state of executive pay produced with an independent remuneration consultancy firm M M & MM&K Limited. Our survey was used by the team at BIS as part of its background research into the state of executive pay.

In additional to our analysis of executive pay trends, Manifest has unparalleled evidence of trends in how shareholders actually vote at AGMs. This data stretches back to before the introduction of the current Directors’ Remuneration Report Regulations and graphically demonstrates the levels of shareholder dissent, or otherwise at these meetings.

3 Directors’ r emuneration regulations


The new binding vote proposals are a welcome step forward in corporate accountability. There are, however, potential implementation problems that we can foresee which are worthy of the Committee’s consideration:

3.1.1 The Single Figure:

The role of the single figure has, with respect, been over-played. This is because institutional investors already have a detailed understanding of the costs of the executive pay plans they are asked to endorse. It has been the retail shareholders and media who have tended to struggle and so the single figure has become more of a PR objective than a robust statistical tool.

That is not to say that disclosures could not be improved, however we are concerned that any proposals to put the single figure at the heart of disclosures will lead to reduced disclosure. By that we mean that if only a single figure is presented then it could be determined that no other data would be required. This would be unacceptable as shareholders and other stakeholders need to be able to see not just amounts earned in the year, performance pay earned for previous year’s performance, but performance pay that may be earned for future years' performance.

The committee will no doubt be familiar with the concept of, ‘lies, damned lies and statistics’. Here is a worked example of how the selective use and presentation of data can mislead:

New CEO Mrs X is appointed on the following terms:

· Salary £1 million p.a.

· Bonus £1 million p.a.

· Share award of £10 million of shares which vest in 5 years

· Disclosed Total Remuneration:

® Year 1 = £2 million

® Year 2 = £2 million

® Year 3 = £2 million

® Year 4 = £2 million

® Year 5 = £12 million [1]

· Mrs X’s Average Total Remuneration per year = £4 million

The Single Figure approach could therefore mean that it is not until many years down the line that it can be seen how much the package has yielded.

The forward looking nature of detailed disclosure helps investors see the potential future rewards and model that against their investment projections.

The proposals for pensions must also ensure that they use the increase in transfer value of accrued pension.

4 Chart com p aring company performance and CEO pay


The proposals in Table B require a chart comparing performance and CEO pay. There is already a requirement for a TSR chart over five years, and it is important that CEO pay should be compared over a period of (at least) five years.

It is worth noting that in the case of WPP and analysis of CEO pay over five years is not sufficient, as Sir Martin Sorrell received total remuneration of £50 million in 2004, according to a recent article in the Guardian.

CEO pay should ideally be shown for both total remuneration realised (i.e., the single figure) and total remuneration awarded (i.e. including the expected value of deferred bonuses and long-term incentives rather than the actual outcome). Sophisticated investors need to be able to see both of these figures.

In addition to TSR, which should be shown in both absolute and relative terms, companies should show profits and dividends (which are required in the new table A) and other key performance indicators, which will be required to be disclosed under the new narrative reporting.

5 Information about who has advised the remu ne ration committee


Fees for consultants who advise the remuneration committee should be disclosed and these should be split down between fees for advice to the remuneration committee and advice for other services to the company and its pension funds.

Companies will be required to explain how they deal with the conflicts of interest. This enhanced disclosure of fees will enable shareholders to see the scope of the potential conflicts.

In the US, enhanced scrutiny of remuneration consultants has led to many of the larger firms spinning off their specialist executive compensation arms into separate independent firms. The committee should be made aware of these conflicts and the potential benefits of greater independence in advisers.

6 Binding versus non-binding votes


The Committee will be interested to know that while the votes on the share-related pay have always been binding they have, according to the data, not been used to the same extent as the advisory vote. By this we mean that the data shows a reluctance to use binding measures to moderate potential rewards. This is important because shareholders have had the ability to prevent excessive payouts from share plans but appeared to prefer to use a softer signalling mechanism. This behaviour should be explored otherwise it has potential consequences the for new binding policy vote.

7 Investor d isclosure


As much as the quality and rigour of the regulatory environment, the quality of engagement and dialogue between companies and their owners lies at the heart of the success of the proposed laws. Shareholder registers are more diverse than ever before and it is no longer the case that companies can resolve their AGM issues through selective briefings with a few City firms or their trade associations. The globalised nature of investing brings a new dynamic and requires new skills and competencies. Companies need to be able to understand their shareholders as much as fund mangers’ clients need to be able to understand how their money has been invested. The proposed regulations on directors’ pay are silent on how investors should discharge their stewardship responsibilities and there are unanswered questions about fund manager disclosure of their voting activities and the nature of their decision-making processes.

June 2012

[1] This assumes the share price is the same after five years as at the appointment date. If the share price doubles the award would be worth £20 million when it vests and so the Year 5 total remuneration single figure would be £22 million. On the other hand if the share price halves then the award would be worth £5 million when it vests and so the Year 5 total remuneration single figure would be £7 million

Prepared 26th June 2012