Norway’s sovereign wealth fund wants to cap executive pay
10/04/2017
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Norway’s sovereign wealth fund, the world’s largest with a stake in 1.3% of global equities, has called for a cap on executive pay and fiscal transparency at the companies in which it invests, further buffing its reputation as an ethical investor.

The fund has a significant influence on global stewardship trends, given its size and leadership on these issues.
Norway’s central bank, the manager of the fund, said in a new policy document that, in every company, “the board should… disclose a ceiling for total remuneration for the coming year” for the chief executive.

Interestingly, the fund is no fan of incentive measures tied to share price, such as relative TSR. This is indicative of a global trend.

Specific elements of the new policy are that:

  • The board should ensure remuneration is driven by long-term value creation and aligns CEO and shareholder interests. A substantial proportion of total annual remuneration should be provided as shares that are locked in for at least five and preferably ten years, regardless of resignation or retirement.
  • The board should develop pay practices that are simple and do not put undue strain on corporate governance. Allotted shares should not have performance conditions and the complex criteria that may or may not align with the company’s aims.
  • The board should provide transparency on total remuneration to avoid unacceptable outcomes. CEO remuneration should be determined and settled in cash and locked-in shares each year. The board should also disclose a ceiling for total remuneration for the coming year.
  • The board should ensure that all benefits have a clear business rationale. Pensionable income should constitute a minor part of total remuneration. The board should commit to not offering any end-of-employment arrangements that effectively shorten or dilute the lock-in of shares.

The effective elimination of long term incentives in favour of long term equity holdings echo the recent report from the UK House of Commons Committee investigation into governance (See HERE).

These requirements reflect the complaints from under-resourced governance analysts wishing their lives could be easier, and promote simplicity so executives “can focus on business”.
The fund holds stakes in about 9,000 companies worldwide, representing 1.3% of the global market capitalisation. Its direct impact on ASX listed companies will be limited to the larger companies, in the medium term, given it does not typically invest in smaller, less globally exposed companies.

With its weight, and its often-praised management requirements on ethics and transparency, the Scandinavian fund sets the bar for investment funds worldwide.

The shift comes as challenging a company’s remuneration policies have proven to be increasingly successful.
While for many years, the Norwegian wealth fund had little to say about executive pay, it has recently begun to play a more active role.

Last year, it voted against the executive pay policies at companies including Alphabet, Goldman Sachs, JP Morgan and Sanofi.

The fund’s policy document said that in order to align a CEO’s interests with those of shareholders, “a substantial proportion of total annual remuneration should be provided as shares that are locked in for at least five and preferably 10 years, regardless of resignation or retirement,” and without any conditions based on a company’s performance.

The Norwegian fund, worth around 7.87 trillion kroner (€859bn, AU$912bn) at the end of March, grew by NOK298bn in the first quarter, its third-best quarterly performance in its 20-year history.

The fund invests in stocks, bonds and real estate.

The policies announced on 7 April are a signal it wants to set the bar for investor responsibility even higher.

Ethical rules already prohibit the fund from investing in companies accused of serious violations of human rights, the use of child labour or serious environmental damage, as well as in tobacco companies and manufacturers of “particularly inhumane” weapons.

And in line with a 2015 vote in Norway’s parliament, the fund cannot invest in mining or energy companies where coal represents more than 30% of the business – a somewhat paradoxical stance for a fund bankrolled by Norway’s oil revenues.

See the policy HERE.

© Guerdon Associates 2021
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