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When Shareholders Revolt

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Top managers of banks are finding their pay packets questioned by those for whom they are supposed to be working

Some diamonds glitter. Some do not. Last week, in a rare display of shareholder activism, investors representing 27 per cent of Barclays’ equity shares rejected the bank’s Board decision to pay CEO Bob Diamond an annual compensation of £25 million. To them, he was simply not worth the money. Earlier, in a similar exercise of ‘shareholder democracy’—as it is called, though it’s one-share, one vote, not one-man, one-vote—a majority of Citigroup’s owners questioned the wisdom of paying their bank’s chief Vikram Pandit an annual packet of $15 million. At both banks, investors have seen their stock holdings lose about a quarter of their market value over the past year. The Swiss bank Credit Suisse has also faced irate shareholders over the same issue lately.

Bankers are not everyone’s favourite people in the West after the Great Recession, given their role in it. What has stirred investors up, however, is a recent move by regulators to have every bank put the pay scales of its top executives to a specific vote among shareholders. In the US now, such a vote is compulsory, but a bank’s board is free to reject the outcome. In Europe,  a rule is in the works by which a bank must not only hold such a poll, it will also be bound by its result. 

The Barclays result, while not binding, has unsettled the bank’s chairman Marcus Agius, who has said he is sorry for not having engaged shareholders earlier, and now promises to align “profits in favour of shareholders”. This could mean bigger dividends for shareholders and smaller pay packets (and bonuses) for executives.

Nirupama Soundararajan, head of Ficci’s corporate law division, attributes such activism to a trust deficit between investors and managers. She supports investor vigilance on matters of corporate governance, but says “shareholders should not stretch their mandate too far”. For, the job of top managers is to make judgment calls, and they should not be constantly second-guessed on these. Agrees Deepak Kapoor, a corporate lawyer: “In a professionally managed company with a board that a CEO is answerable to, such micro-management by shareholders would only restrain CEOs and maybe even drive them away.”

While many at the top are understandably unhappy with shareholders finding their voice, regulators in the West believe that this is one way to keep bankers from getting drunk on their own incentives and generating the mess they did recently. Everyone in power should know they are answerable to those on whose behalf they wield it. “This should act more as a check than dampener on decision making,” says Soundararajan.