Sufficiently rational?

It seems proxy advisor Glass Lewis has caused a stir by advising clients to vote against the new pay arrangements for London Stock Exchange Group chief exec David Schwimmer.

Schwimmer made headlines a couple of weeks back when it emerged the company wanted to raise his pay from around £6m in 2023 to a tad over £13m this year.

And this after one of his employees—Julia Hoggett, CEO of the London Stock Exchange—kick-started a debate last year with a blog calling for higher executive pay so the UK was to compete with other markets.

Bloomberg quotes Glass Lewis saying: “We do not believe that the company has sufficiently rationalised an increase of this magnitude in a lump-sum approach, particularly given the CEO’s pay relative to UK peers.”

That’s going to sting over on the LSEG board and if shareholders follow the Glass Lewis advice, Schwimmer may have to go to Cleethorpes instead of Klosters for his holidays. (It should be pointed out, Board Agenda has no idea where Schwimmer holidays. We will be in Cleethorpes though, as usual—Ed.)

Glass Lewis, and other proxy advisors, now stand accused of “handicapping” the UK in its efforts to find the best leadership talent. CityAM quotes Emily Watts at Cavendish, saying: “Proxy advisors have the ability to dictate rules of conduct that—while not legally binding—effectively constrain company behaviour based on arbitrary benchmarks.”

And as if we needed a reminder that CEO pay has become a significant conflict, fellow proxy advisor ISS also recommended this week that shareholders reject a plan at Smith & Nephew to increase the pay of CEO Deepak Nath from $9.15m to $11.79m. The Financial Times reports ISS has “material concerns” about the pay plan.

At AstraZeneca, shareholders staged a technical revolt, voting 36% against a £1.8m pay rise for chief executive Pascal Soriot. Though the plan went through, under current rules the vote goes on the Investment Association’s Public Register and the board will have to respond to shareholders in some way.

The executive pay debate is now morphing into an argument about the role proxy advisors play in the market, one that echoes recent spats over in the US.

That’s on top of a larger debate about UK governance and whether it has become too burdensome, a claim made by the Capital Markets Industry Taskforce, a campaign group chaired by Julia Hoggett. At deeper level, however, the debate is about something bigger: setting the foundations for the future UK economy. On one side are those looking for high pay and easier regulation as a competitive edge (especially after Brexit). On the other are those who believe the UK’s position is about bigger problems than executive pay and regulation. It’s a debate set to run and run.

‘Learn and improve’

Over at the Institute of Business Ethics (IBE) there is a warning about the EU’s brand spanking new Corporate Sustainability Due Diligence Directive (CSDDD).  It has to be enforced properly, the IBE declares.

The directive was passed back in March (now awaits final approval by the European Parliament) and asks companies to check their supply chains for human rights and environmental abuses.
There were last minutes hiccups but the legislation went through.

According to Rachael Saunders, deputy director at the IBE, the new laws must be aimed at the right companies.

“The directive will only work if its enforcement is pragmatic and targeted at egregious failures of bigger organisations rather than seeking to hold them accountable for failures they could not have foreseen.”

She adds: “If human rights or environmental failure are identified in supply chains and the bigger corporates at the top of the chain can make a strong case that, despite due diligence, they were genuinely unaware of the practice, there must be value in taking the opportunity to learn and improve rather than move straight to punishment.”

Fine for exam cheats

KPMG’s exam cheating scandal in the Netherlands has earned the firm a whopping $25m from audit regulators in the US.

The penalties, against the Dutch branch of the firm and Marc Hogeboom, its former head of assurance, comes after “hundreds” of accounting trainees shared answers ahead of exams over a five-year period from 2017 to 2022.

The firm—fined the full $25m, and Hogeboom, “permanently disbarred” and fined $150, 000—were also found to have made “multiple misrepresentations” to regulators during investigations.

The Dutch Authority for the Financial Markets has imposed “enhanced supervision measures” on the firm.

Erica Williams, chair of the Public Company Accounting Oversight Board (PCAOB), says the regulator “will not tolerate cheating”.

“Impaired ethics threaten the investor confidence our system relies on, and the PCAOB will take action to hold firms accountable when they fail to enforce a culture of honesty and integrity.”

Stay in bounds

And with that warning on sustainability comes another: over in the US new climate risk reporting rules appear to be on hold while legal action challenging their introduction plays out.

Since being green-lit at the beginning of March, up to five different efforts at litigation to “stay” the new rules have been launched. Luke Wake, a lawyer representing the Texas Alliance of Energy Producers, one of the litigants, told Bloomberg: “The Commission knows that it has way overstepped its bounds.”

In an article for Harvard governance blog, the SEC says: “In issuing a stay, the Commission is not departing from its view that the final rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions. Thus, the Commission will continue vigorously defending the final rules’ validity in court and looks forward to expeditious resolution of the litigation.”