Anger over executive pay boils over as boards face a 'shareholder spring'

For Catherine Howarth, "it's been a totally fabulous week". The chief executive of campaign group Fair Pensions, which has long toiled to persuade City investors to rein in the worst excesses of British listed companies, the unprecedented wave of investor rebellions over recent days represents nothing less than a revolution.

"There's this really long history of shareholders being unwilling to use the powers they have. The fact that this is changing at the moment is really something to celebrate," she says. Paul Hewitt of investor lobby group Manifest describes it as a "shareholder spring".

Just weeks after the Occupy protesters were chucked out of the City, the sharp-suited fund managers who picked their way through the tents to get to their desks each morning have staged their own protest against fat-cat capitalism.

On Thursday alone, five companies felt the wrath of investors and suffered revolts over their pay policies. For Aviva, the insurance company, the rebuke was so strong that more than half its investors rejected its remuneration report in protest at pay for underperformance, particularly in respect of chief executive Andrew Moss.

The revolts followed a string of protests at companies as diverse as Barclays and mining company Xstrata. Shareholders' fury has not just been directed against remuneration reports, but also against individuals. Sly Bailey has fallen on her sword at Trinity Mirror, and even a boardroom veteran such as Alison Carnwath has not been immune.

More than one in five investors voted against Carnwath's re-election to the board of Barclays as chair of the remuneration committee that nodded through Bob Diamond's pay; and she also faced a revolt at hedge fund Man Group, where investors feel she has been involved for too long to be truly independent. Advertising giant WPP and bookie William Hill also face protests.

Several factors have come together to make 2012 the most stormy annual meeting season in living memory. One is the government's vocal determination to tackle "rewards for failure". Business secretary Vince Cable has proposed radical reforms, including giving shareholders a binding vote on pay, rather than the advisory vote introduced by Labour, and forcing companies to disclose pay deals for departing directors.

Some of the measures have been fiercely criticised by business groups, including the CBI; but he is expected to stick to his guns when he publishes final proposals next month.

The grim economic backdrop and the pessimistic public mood has also thrown some of the lavish rewards for top executives into sharp relief. George Dallas, director of corporate governance at fund manager F&C, says bumper pay packets have come under increased public pressure because many families are facing declining living standards. "There is a lot of austerity going round and the taxpayer is still feeling that the crisis hasn't gone away," he says.

A third factor driving the "shareholder spring" has been a concerted campaign by groups such as Fair Pensions, trades unions and green groups. They have worked to persuade small shareholders, including retail investors and workers with pensions or insurance funds – who between them hold billions of pounds' worth of shares – to ask how their money is being invested and demand a more active approach.

Jenny Cramer's husband had often told her to stop shouting at the TV and get out and do something – so when her mother left her a few shares, she decided to exercise her right to go along to the AGMs of AstraZeneca and Barclays. "I thought it was astonishing that one was able to address these people who are sitting up on the stage," she says.

She argues that making the voices of shareholders heard is essential to cracking the culture of excess. "They've been doing this since the 1980s – granting themselves larger and larger bonuses, and they all come from the same pool."

At the hostile Aviva meeting, too, bosses were forced to confront furious private shareholders. Anthony George, who has been an Aviva shareholder for 40 years, deplored the fact that pensioners, who along with many small shareholders depend on Aviva for their income, had "suffered because of the bad decisions Aviva have made".

Howarth insists that growing pressure on City fund managers from their clients has helped to change the climate. "At the end of the day, investment management firms are commercial organisations; they compete for business," she says.

However, some of those in the City who have been trying to promote shareholder activism for many years warn that high-profile protest votes like those of the past fortnight are a sign that the relationship between shareholders and executives has broken down.

Colin Melvin, chief executive of Hermes Equity Ownership Services, which prides itself on its level of dialogue with companies, says: "In some ways, a no vote is a sign of failure. What we've seen is an apparent increase in activism and we need to be careful we don't confuse this with long-term stewardship."

Lord Myners, former Labour City minister and once the head of a fund management firm himself, says the boiling-over of investors' frustration is a symptom of a deeper crisis in the way Britain's companies are run. "I think what we're seeing is institutional shareholders beginning to ask questions about the people who sit on boards to represent their interests, namely the independent directors," he says. "The reality is that most non-executive directors are appointed by the chairman."

He says shareholders rarely even get the chance to meet the non-executives, who are meant to make sure the shareholders' perspective is represented.

Myners advocates the Scandinavian approach, in which shareholders sit on the nomination committees that choose new directors, ensuring the board cannot be packed with the chairman's cronies. "Instead, we have the North Korean model, in which each candidate is re-elected every year, and 99.99% of them get voted in with 99.99% of the vote."

Peter Butler, chief executive of fund manager Governance for Owners, says that battles over pay, though they capture the public mood, can mask other, more fundamental problems at firms. "There are so many huge problems with corporate companies, yet all we're having is a standoff about what directors pay themselves when the focus should be on the bigger problems."

Whatever the causes of this revolution, now that investors have started to exercise their rights, they will want to see results. Robert Talbut, chief investment office at Royal London Asset Management, argues that the dissent has been caused not by communication issues – as suggested by Barclays and Aviva – but because of growing concerns about the link between salaries and returns.

"The more active approach reflects a cumulative building of concerns regarding returns to shareholder in the difficult economic times and whether there was a strong enough linkage between pay and performance. This should not be read as a sudden, kneejerk reaction by shareholders," he says.

If he's right, the "shareholder spring" could just be the beginning of a more complex, and perhaps more stormy, relationship between shareholders and executives. Myners believes the ructions will continue until top executives start to understand what is going on in the real world, far beyond the boardroom.

"Certainly, the 'we're all in it together' message does not seem to have got to directors or remuneration committees," he says.