Two major stories hit the headlines last week, due to governance concerns on opposite ends of the corporate spectrum. Whilst Sports Direct was under the spotlight as Mike Ashley appeared before MPs, and appeared to admit that staff were paid effectively below the minimum wage, WPP faced criticism for CEO Sir Martin Sorrell’s £70m pay package – the highest in the FTSE by a mile. Despite the vast differences in the sums of money being debated, common lessons emerged for pension funds from both of these events.
Firstly, both stories demonstrate that governance factors are deeply interconnected with social issues. Executive remuneration is typically viewed through the governance lens. But when the problem is the quantum, not the policy – the fact that the pay is almost 200 times the average worker’s - that goes beyond governance to social, to the company’s ties to the community and its license to operate.
Sports Direct is a very different story from the opposite end of the scale. Mike Ashley admitted fundamental governance concerns, that Sports Direct had ‘outgrown’ him, and that because of that he didn’t have a grasp on the employment conditions. He described the revelations on working conditions as an ‘unpleasant surprise.’ But none of the issues raised at Sports Direct should have been surprises to Mike Ashley. They were publicly documented over the past several years, including by journalists.
They shouldn’t be surprises to pension funds either. The dramatic revelations are only the tip of the iceberg that comes with a business model built on reliance on precarious working conditions. Engaging upon the ‘S’ factors that relate to a company workforce can reveal much deeper insights into the business.
The second lesson to learn from these two very different stories is that both were preventable – and as the saying goes, prevention is better than cure. It is much more challenging to correct these issues as an investor, than it would have been to intervene at the first signs of trouble. And indeed, Sports Direct has been the subject of shareholder engagement by a notable group of pension funds. But should it really need to reach a situation in which the head of a company that has fallen out of the FTSE 100 appears before parliament, having refused and resisted to do so over several months, before mainstream attention is drawn?
As for WPP, the pay package that some investors – though not a majority – voted down at last week’s AGM was in fact voted through by investors during a binding vote in a previous year. The fact that last week’s vote was non-binding is no excuse for inaction: it presented a clear opportunity for investors to express concern over the ‘remuneration creep’ implemented by WPP. But the fact is that the FTSE’s largest pay deal in years could have been prevented by investors exercising their voting rights and taking a long-term approach to stewardship when voting on the remuneration policy that made it possible.
Going forwards, investors cannot ignore these lessons. Active engagement and voting is crucial to avoid governance and social factor pitfalls like these. In the case of Sports Direct, investors need to focus on the culture of fear among workers and the admitted inability of management to oversee employment practices. As for WPP, a new remuneration policy is on the table for 2017. This is a vital opportunity for investors to send a strong and coordinated signal that the quantum of pay at the company must be restrained.
The financial case for action on these issues for pension funds is clear. They matter to the long-term performance and success of these companies. And they’re also hugely important to savers – the public outcry at each company is a case in point. The effect of these companies’ actions on their workers, communities and society need not be detrimental. It’s up to stewards like pension funds to steer them onto paths which both protects beneficiaries’ interests and allow cohesion in the societies in which they live and operate.
ShareAction campaigns manager Lisa Nathan