By Ian Fraser
Published: Sunday Herald
Date: 15 May 2011
Lloyds Banking Group is facing a protest vote from investors against the £13.4m package and generous pension awarded to chief executive Antonio Horta-Osorio at its annual general meeting in Glasgow this Wednesday.
The bank’s board is also expected to face a barrage of criticism from small investors over remuneration policies, customer services and overall strategy at the SECC event, at which long-serving directors Archie Kane and Helen Weir will bow out.
However, the investor protest is unlikely to prompt a rethink at state-rescued Lloyds. The bank is 41%-owned by the British Government, and it is understood that UK Financial Investments, which holds stakes in part-nationalised banks on the Government’s behalf, will rubber-stamp Horta-Osorio’s generous “golden hello”. Small shareholders including London-based Martin Simon are already lining up to lambast the Lloyds board for paying the ex-Santander boss Horta-Osorio “77 times the salary of a High Court judge”.
One senior investor said: “The Government is stuck between a rock and a hard place with Lloyds. Given Lloyds’ poisoned chalice status, the Government recognises that the only way of getting anyone remotely competent to sort out the mess was to offer them a massive carrot. Having said that, past experience shows that lavish executive rewards don’t necessarily promote the right sort of behaviour.” While institutional investors are concerned about the size of Horta-Osorio’s golden hello, they admit they are unlikely to vote down the bank’s remuneration report in Glasgow.
But some investors and corporate governance groups have been raising alarm bells. Corporate governance adviser Pensions & Investment Research Consultants is actively advising investors to vote against the remuneration report. PIRC analyst Djolan Captieux said: “The new CEO received a grant of shares equalling 420% of his base salary upon joining the company which we would flag as a major concern, especially following a financial year where the bank reported a net loss.”
The Association of British Insurers (ABI), whose members control 15% to 20% of the London stock market, has issued an “amber top” warning to highlight the package. The alert is a signal to investors that they should think twice before voting the arrangement through. Both PIRC and the ABI are alerting investors to the fact that the performance targets for Lloyds’ long-term incentive plans (LTIPs) have not yet been disclosed – which means the bank is asking investors to approve an open-ended scheme.
The bank claims it had little choice since the results of a top-to-bottom strategic review of Lloyds Banking Group, being conducted by Horta-Osorio, will not be completed until early June. He is expected to propose radical surgery including the creation of a new non-core unit that will house businesses such as Lloyds’ private equity unit and the monstrous collection of non-performing loans and investments amassed by former HBOS corporate banking head, Peter Cummings. The Lloyds remuneration committee, chaired by Lloyds non-executive director Anthony Watson, has been seeking to assuage City fears in recent weeks.
Investors report that Watson claims that Horta-Osorio accrued an €80m pension pot at Santander and that, if he was to be persuaded to sacrifice this arrangement, Lloyds had to make a generous pension offer. One investor said: “Watson has certainly had his work cut out.”
Some investors are concerned that Horta-Osorio is a largely untested commodity and oversaw a collapse in standards of customer service at Santander UK. Colin McLean, chief executive of SVM Asset Management, suggested his skills may have been over-hyped. “He may be a name but he is a little bit unproven.” McLean added that he is concerned about other issues at Lloyds, which Horta-Osorio admitted will take three to five years to get on its feet again.
The bank has a funding gap of £200 billion-plus between its loans and its deposits. Within this funding gap are £70bn of soon-to-expire emergency facilities and state-subsidised funding which Lloyds must replace as a matter of urgency. McLean said it is the biggest challenge Lloyds faces. “The core problem is replacing the funding. While that is not an insurmountable obstacle, it’s going to be very stretching.”
A spokesman for Lloyds Banking Group declined to comment.