At the annual meeting of German reinsurer Munich Re last April, shareholders marked the departure of longstanding CEO Nikolaus von Bomhard with a long and emotional standing ovation. But their affection for the departing chief did not stop shareholders from partaking in a growing trend of rebellion against managment seen across Germany. Soon after the applause, the shareholders voted overwhelmingly against a draft resolution on executive compensation, perceiving the performance targets detailed in the proposal as not sufficiently concrete.
The vote reflected a growing tendency for shareholders in Germany to defy company management, particularly on the issue of executive pay. At recent annual meetings of pharmaceutical giant Merck and broadcasting company Prosieben Sat1, for example, more than half of shareholders rejected compensation plans for executive board members. According to Handelsblatt calculations, in fact, nearly 34 percent of executive compensation packages have been rejected this year. This is by far the highest level since these votes were introduced in 2010. The sharp upward trend began last year, when the rejection rate jumped from 7.2 to 23.8 percent.
Behind the rise in the new activist streak are proxy advisory firms that represent shareholders and are taking on an influential role at annual meetings. The arrival of advisory firms like ISS, Glass Lewis, Proxinvest and Ethos, which represent large international investors and British and American pension funds worth billions, have changed once mundane shareholder votes into unpredictable, often turbulent affairs.
The proxy firms bundle shareholder votes, swaying the debate and helping to drive up shareholder participation at annual meetings that, until recent years, were often poorly attended. The shareholder attendance rate at the annual meetings for the 30 companies listed on Germany’s benchmark DAX has reached 60.7 percent, a record high, according to a Handelsblatt analysis.
Under German law, companies are not required to have compensation proposals approved by shareholders, and rejections of pay packages at annual meetings are not legally binding. But that will soon change. This summer, Germany will begin implementing new European Union rules on shareholder rights that allow shareholders to vote on executive pay at least once every four years or whenever there are substantial changes to pay packages.
Some German companies are already making adjustments in anticipation of the changes. After its shareholders rejected a compensation system last year, Deutsche Bank adjusted the pay packages for top management so that bonuses are more closely tied to corporate goals. When the company put the revised plan up for a vote at this year’s annual meeting, shareholders voted overwhelmingly to approve it, with only 3.2 percent opposing.
Yet, only eight DAX-listed companies have allowed shareholders to vote on compensation so far. German software giant SAP refused to even include the issue on its annual meeting agenda this year after, in the previous annual meeting, more than 45 percent of shareholders rejected an executive compensation plan. Shareholders have criticized the company’s supervisory board chairman, Hasso Plattner, as having lavish compensation. This spring, Chief Executive Officer Bill McDermott, with a salary of €14 million ($16 million), was the highest paid chief executive on the DAX.
SAP co-founder Mr. Plattner defended the company, arguing that, due to global completion from companies like Oracle and Microsoft, “executive compensation has to be internationally competitive.” Shareholders, however, displayed their disapproval with SAP management at this year’s meeting by barely ratifying a procedural and normally routine motion involving the supervisory board.
Speaking at a recent gathering of business journalists in Frankfurt, Friedrich Merz, the supervisory board chairman at Blackrock in Germany, said that excess compensation at some companies threatened to erode faith in the market economy. With about €5 trillion in invested assets, Blackrock is the worlds’ largest asset manager and it has, on average, a stake in about 5 percent of all 30 DAX companies. Mr. Merz has already issued a warning to these companies, saying that he would see to it that Blackrock no longer remains silent when it believes executive pay to be excessive.
Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author: email@example.com.