Norway’s sovereign wealth fund’s plan to take on the pay packages of executives is great news for financial markets.
Norges Bank Investment Management (NBIM), the manager of Norway’s sovereign wealth fund owns 1.3% of the world’s listed companies and 2.4% of European equities, putting its $900bn to good use in recent years by focusing its efforts on divesting from investments that are harmful to the environment, such as coal.
The move from improving its environmental credentials to arguing for lower executive pay likely reflects an attitude towards executive compensation that is prevalent in all of the Nordic countries, and Norway in particular.
NBIM is said to be looking for a company that is overpaying its executives and make an example of them in a paper it will write in which it will state what behaviour it considers acceptable.
In Norway information regarding the tax your fellow citizens paid, their salary and their overall wealth have been publicly available for several years, and is accessible via online records.
The intention behind such an approach is that in understanding how much your fellow citizen has and what they paid in tax, they will build a more transparent society in the process and create bonds of trust between citizens.
In the UK such measures are unlikely to work given the differing approach towards secrecy, however in their crackdown on excessive pay in public companies we should welcome our Nordic neighbours’ intervention given the scale of the domestic con.
Vikings, we need your help!
Last week engineering specialist Weir Group saw 72.4% of investors reject a proposal to provide a variety of share awards to the management of the company. Having had its proposals defeated, the company released a statement in which it said that it was “looking forward to further engagement with shareholders regarding remuneration”.
There was also uproar at pharmaceuticals firm Shire where a proposal to hike chief executive Flemming Ornskov’s salary by 25% scraped by with only 50.5% of those in attendance supporting the motion.
Coming at a time of uproar at the salaries paid to senior management at a number of Britain’s companies, the capital markets could benefit from the insights of a country which has managed to cannily invest its oil wealth into a pot of prosperity for its citizens while developing ancillary industries in technology, finance and pharmaceuticals.
While CEOs that are able to generate considerable increases in a company’s share price should of course receive a suitable reward for their efforts, businesses such as Weir Group and Shire should consider the message that their actions are sending to investors.
Royal London said last week that it would be voting against the renumeration reports of Standard Chartered and Reckitt Benckiser, which both have AGMs this week.
Royal London in particular did not mince its words regarding Reckitt Benckiser’s pay plans. Royal London owns a stake worth £254m in the consumer goods maker.
“Whilst Reckitt Benckiser has provided consistent growth for shareholders its pay awards for executives consistently pushed the boundaries of acceptability in the UK,” it said.
“Having weathered shareholder anger in the past, we hope that the vote this year will be a tipping point for Reckitt Benckiser’s board.”
Time to learn the law of Jante
While Norway is geographically close to the United Kingdom, culturally it has many differences in relation to attitudes towards wealth and inequality.
One of the ideas said to be central is the so-called “Janteloven” or “Law of Jante”. An idea developed by Danish-Norwegian writer Aksel Sandemose, it refers to the Scandinavian tendency to value social equality and harmony, as well as disapproving of opulent shows of wealth.
There can be few things more offensive to the Janteloven than excessive pay at boards in which the Norwegian government holds significant stakes. While Norway will always have substantial cultural differences in the way it conducts business when compared to the Anglo countries, we should welcome their efforts to bring discipline on pay to UK boards.
What have the Vikings ever done for us?
For companies paying high or excessive salaries to its management, such salaries can be a drag on performance, particularly for companies in the sub FTSE 350 area. There are no rules limiting, for example the relationship between the salary of a CEO and the turnover of a listed company.
In the example of companies in the exploration sector in oil and gas and mining, it is not unheard of for management salaries to constitute as much as 10% of a company’s group turnover, even if the company itself is unprofitable.
This can create conflicts of interest when the management wishes to optimise the payouts to itself and the shareholders wish to maximise their return on capital.
Until recently there was little recourse for minority shareholders unhappy with the state of play, with activist investors holding relatively little sway when compared to their role in the USA.
NBIM’s involvement in capital markets should empower shareholders to engage proactively with their management team and should lead to a rebalanching in their relationship with investors.
The involvement of the Norwegian sovereign wealth fund will give succour to the embittered minority shareholders that can now count on the support of a powerful and wealthy friend, and should lead to the management of listed companies engaging in a much more cautious manner when it comes to considering appropriate compensation packages.