By Devanesan Evanson
ANYTHING that is money-related has in recent times become a sensitive matter in our daily lives, no thanks to the economic and financial hardship that has befallen the global community following the eruption of the COVID-19 pandemic.
Amid a fragile economic environment where many in the workforce became unemployed or being subject to pay cuts, it is inevitable that minority shareholders are paying close watch on the remuneration package that is doled out to key management personnel, particularly the head honchos of listed companies and their boards of directors (BODs).
Pitted against rising volatility which have taken a toll on stock prices, surely it makes valid sense for investors who are left in the lurch with plunging stock prices to question if it is justified for CEOs and BODs to continue enjoying immense perks at their expense.
Painful revelation
Doubtlessly, the recent findings by the Securities Commission via its Corporate Governance Monitor 2020 (CG Monitor 2020) on the board remuneration package of FTSE Bursa Malaysia’s Top 100 (FBM100) Index constituents (as of Dec 23, 2019) will likely raise eyebrows.
This is especially so as minority shareholders weighed-in on the stock performance of the companies in question against the size of the remuneration even though it has recorded a decline from the previous year.
Six of the 10 companies with the highest total board remuneration are also on the top 10 listed companies with the highest-paid CEOs, which suggest that a significant portion of total board remuneration of these companies can be attributed to CEO pay packages.
This is despite five of the top 10 highest-paid boards in 2019 recorded a decline in total board remuneration from 2018, the largest being 23%.
The five which recorded a decline year-on-year (yoy) were Genting Bhd, Genting Malaysia Bhd, YTL Corp Bhd, Public Bank Bhd and VS Industry Bhd. Those which saw an increase yoy included IHH Healthcare Bhd, Sunway Bhd, AirAsia Group Bhd and Berjaya Corp Bhd.
Despite the decline, Genting Bhd still had the highest total board remuneration at RM172.24 mil, followed by Genting Malaysia (RM77.80 mil), YTL Corp (RM76.09 mil), IHH Healthcare (RM63.03 mil), Public Bank (RM62.77 mil), AirAsia Group (RM60.50 mil), Sunway (RM46.83 mil), Berjaya Corp (RM39.50 mil) and Leong Hup International Bhd (RM32.56 mil).
Channelling discontentment
This brings us to the key question of how minority shareholders are able to voice their displeasure pertaining to the high remuneration that is dished out to key management personnel (including BODs) if measured against stock price performance of the companies that they invest in.
The main justification for high remuneration (inclusive of fixed income, bonuses or stock options) is that it is necessary to attract talent that is able to produce good returns for shareholders.
Alternatively, the company will argue that despite the poor performance of the company, there was still hard work that was done by the BOD. By extension, the argument could also be that the BOD averted a greater decline in performance and for that they should be handsomely remunerated.
What we can conclude is that the BOD remuneration is an inexact science and one cannot take a simplistic approach to determine if it is ‘high’ or ‘low’. We need to look at the context and peculiarities of the industry, among others.
It can even be argued that there seems to be a large element of luck in CEO/BOD remuneration. For example, a study found that a spike in world oil prices tend to lead to large increases in the salaries of CEOs at oil & gas companies – in other words, their head honchos enjoy large pay cheques as a result of factors that were outside of their control.
Fighting back
There is an in-built conflict of interest when we expect BODs to regulate their own remuneration regardless of the role of the nominating committees. Minority shareholders, and more importantly, major shareholders must play a proactive role by voicing their displeasure through the ballot.
Therefore, the best channel for minority shareholders to express their grouses is to leverage shareholder’s activism by collaborating closely with institutional investors who tend to have bigger shareholding size. Alternatively, they can pursue the AGM/EGM platform to voice their discontent, hoping that the publicity will result in some self-restraint amongst the BOD members.
Institutional investors can influence CEO compensation directly through a monitoring or supervisory role. Their representation at the BOD level will allow them to perform a more active supervising role, thus able to prevent CEOs from controlling the board or behaving opportunistically with remuneration matters.
“This indicates that institutional investors collectively, are in a position to ensure that the remuneration is fair and commensurate with the role and performance of the director,” concurred the SC’s Corporate Governance Monitor 2020.
“Thus, institutional investors in exercising their stewardship role, should continue to engage the board in relation to remuneration, review the link between pay and performance, and exercise their votes accordingly.”
Voting out ineffective directors
Minority shareholders must also not forget that the people in the best position to rein in the CEO’s remuneration are none other than BOD members who render final approval to the CEO’s pay package.
Inevitably, these directors are answerable to shareholders who vote them in, hence shareholders are more than capable to remove them for failing to protect their interest.
In this regard, minority shareholders must keep tabs on the performance of company directors, particularly the independent non-executive directors whose obligation is to act as the “eyes and ears” of shareholders.
Sometimes, directors are more responsive to CEOs (who are also substantial shareholders) as these CEOs are able to vote-in the independent directors. Moreover, once such an independent director sits on the board, the director tends to become patronising and unable to question the CEO’s remuneration.
Understandably, being a member of a corporate board is an extraordinarily lucrative job, hence very few directors would wish to antagonise CEOs who tend to have large influence over their nomination and subsequent appointment (even though this goes through a formal voting process during the company’s AGM/EGM).
Devanesan Evanson is the CEO of the Minority Shareholders Watch Group, an independent research organisation to encourage good governance among public listed companies with the objective of raising shareholder value over time.
