World’s Biggest Fund Manager Sets Executive Pay Ultimatum

BlackRock has written to leaders at more than 300 British companies, demanding they rein in any “excessive” executive remuneration or face potential dissenting votes at a string of upcoming shareholder meetings.

The move by the world’s biggest fund manager could have implications for CEOs at thousands of businesses globally, given that it oversees assets worth more than $5 trillion, including stakes in every company in Britain’s FTSE 100 index. It has acted as British companies face new rules that give shareholders a binding vote on their pay policies at least once every three years. The rules were introduced in 2013, so many companies will face their first binding vote this year.

Last April, oil giant BP was forced to defend its executive pay rates after almost 60% of its shareholders voted against a £14 million (US$17 million) package for CEO Bob Dudley. That vote wasn’t binding, but that will change at its next shareholder meeting.

New York-based BlackRock has typically engaged with board members behind closed doors to exert its influence over pay decisions. The UK letter, first revealed by Great Britain’s Times newspaper, may indicate that it is willing to become a more vocal public advocate of performance-linked pay. London-based spokespeople for the company weren’t available to comment Wednesday on whether the letter has implications for its activities in other countries, such as the U.S.

“Executive pay should be strongly linked to performance, by which we mean strong and sustainable returns over the long-term, as opposed to short-term hikes in share prices,” said BlackRock’s letter, which was signed by its head of investment stewardship in Europe, Amra Balic.

“We consider misalignment of pay with performance as an indication of insufficient board oversight, which calls into question the quality of the board. We believe that shareholders should hold directors to high standard in this regard,” it said.

BlackRock’s move comes as British Prime Minister Theresa May considers further measures to regulate the size of pay packets at large listed companies. These include potentially forcing them to disclose the ratio between the CEO’s pay and the rank and file, similar to a policy that has just been introduced in the U.S.

Balic also highlighted pay ratios in the letter. “In case of a significant pay increase year-on-year that is out of line with the rest of the workforce, BlackRock expects the company to provide a strong supporting rationale,” it said. “Large increases should not be justified principally by benchmarking.”

In the U.S., BlackRock faced calls to more closely monitor executive pay last year through a resolution proposed by millionaire and founder of tech company Innovative Interfaces, Stephen Silberstein. His resolution received support from just 4% of shareholders.