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Aviva vows to factor in preference share debacle when setting director pay

Aviva PLC's remuneration committee will factor in any reputational damage to the company from the recent preference shares debacle when setting bonuses and long-term incentives for 2018, Chairman Adrian Montague said May 10.

He told shareholders at the insurer's annual general meeting that the committee would look at pay "dispassionately" and insisted that the company "would not flinch" from doing so. He made the comments in response to strongly worded criticism from some shareholders about the handling of the preference shares issue, including calls for directors to forfeit fees and bonuses.

But Montague stressed that the time was not yet right to address the issue because the U.K. Financial Conduct Authority is conducting a review of the preference shares market following the Aviva incident. And despite the calls from the floor of the AGM for directors to forfeit pay, 97.13% of the shareholder votes were in favor of the 2017 remuneration report, and the same proportion were in favor of the remuneration policy.

Shareholder backlash

Aviva faced a backlash from shareholders and members of the U.K. parliament following a statement in its full-year results in February that it had the ability to cancel certain preference shares at their par value of £1 and noting that under the European Union's Solvency II capital rules for insurers, the preference shares would no longer count as solvency capital from 2026. The shares were trading well above par and were believed to be irredeemable.

Following the backlash, Aviva said March 23 that it would not cancel the securities, but the company continued to face criticism because the threat had hit the price of its and other companies' preference shares. On April 30, Aviva said it would be making a £14 million "goodwill payment" for those who had sold their preference shares before Aviva confirmed that it would not cancel them.

At the AGM, Aviva's board faced harsh words over the handling of the issue. One shareholder said that in seeking legal advice on its ability to cancel the preference shares, the company had been looking for a "loophole," and that doing so was "despicable, dishonorable and deceitful." Another branded the handling of the situation "idiotic."

One shareholder suggested that Aviva's four executive directors — CEO Mark Wilson, CFO Tom Stoddard, UK insurance CEO Andy Briggs and international insurance CEO Maurice Tulloch — forfeit the £7.54 million they collectively received in benefits, annual bonus, long-term incentive pay and pension contributions in 2017, and that as this figure amounted to 73% of the executive directors' total pay, the nonexecutive directors also forfeit 73% of their fees.

'Industrywide issue'

In their speeches before the shareholder questions and answers, both Montague and Wilson apologized for the preference share misstep. Montague said: "Our original announcement created uncertainty and a small number of preference shareholders sold shares when they might otherwise not have done so, and we are sorry for that." Wilson said: "Good companies do not get everything right. But good companies listen when they don't."

Wilson also said preference shares ceasing to count as solvency capital from 2026 is "an industrywide issue that the regulators simply must address."