These cats aren't just fat, they're deaf as well

Those overworked and underpaid executives at United Utilities should be familiar with the old Northern adage, oft used by industrialists: "Where there's muck there's brass." They are also now very familiar with the new Southern adage, oft used by institutional investors: "Where there's brass there's muck."

Unfortunately for the United executives, they were unaware of this bon mot when they gleefully unleashed their new remuneration packages on a watching world at the beginning of the month. Now they are locked in negotiations with institutional investors to try and quell a full-scale revolt over the new pay arrangements at this week's annual general meeting.

It is not surprising investors are a little concerned that United's remuneration committee has erred too much on the side of generosity in devising a new pay package for the executive directors. It involves long-term and short- term incentive plans along with sharp increases in base salaries, which come on top of healthy bonuses awarded last year, including nearly pounds 100,000 shared among three directors because of their work on the acquisition of Norweb. For those investors acutely aware of the sensitivity of executive pay, particularly among utilities, it was all too much to bear.

The real disappointment is that United failed to share those sensitivities. It is recognised that the widespread public distaste over the salaries and windfall share-option profits on offer to directors of the newly privatised utilities was the catalyst for an all-out assault on executive pay. After the Greenbury report, which pointedly singled out the utilities for special attention, it had been hoped that appropriate restraint would be shown. Sadly, United has been unable to rise to that challenge.

What is worse is that the company gives the impression of being extremely grudging about the criticisms that have been levelled against it. Rather than accept that the package needs to be reworked, United seems determined not to make changes. Explanation is on offer, but not modification.

If there is no softening of United's stance in the next few days, then it is important that shareholders also take a united stance. Those institutional investors who have so far watched the debate from the sidelines must be prepared to throw their weight behind their more vocal brethren. This is the first of many possible confrontations between management and shareholders over remuneration. If investors do not indicate quite clearly at this early stage the seriousness with which they are taking their responsibilities, they will brushed aside in future with a contempt that frankly they will deserve.

Shareholder revolts over pay can be dangerous exercises. But United Utilities is no Saatchi & Saatchi. If Sir Desmond Pitcher, United's chairman, storms out in a fit of pique he can hardly take his clients with him. Investors must also remember that the United executives do not go into this meeting with a glowing record this year of creating shareholder value. Since the beginning of the year, the shares have underperformed the FT All Share Index by around 11 per cent, putting United among the worst performers in the sector. The multi-utility concept so passionately espoused by the company has not yet been appreciated by the market.

The best way to deal with this spat is for the United executives to simply defer the introduction of a revised remuneration package. That will give them a chance to demonstrate their commitment to the eminently sensible recommendation from their remuneration committee that they accumulate and hold shares in the company with a value in the order of their annual salary. All the executive directors are some way shy of this objective. Only when a large part of their personal wealth is tied up in the shares of the company will they be able to demonstrate a clear mutuality of interest with their investors.

Musical shares

Tomorrow's document from Thorn EMI setting out its formal demerger proposals will be long on technical detail but somewhat short on any indication of the prospects for the two businesses once they have gone their separate ways. Trading in the shares does not begin until next month, at which point the market will have a chance to pass judgement on the values of the music and rentals businesses.

Of the two, it is the music business that will attract the greater attention. It has already been heavily touted as a takeover target, and EMI's flotation is being seen in some quarters as the trigger for a furious scramble to win control of the last remaining "independent" global music business.

There is no doubt that EMI is already being eyed enviously on both the west and east coasts of America. Speculation about a bid is more than just idle gossip. In particular, the would-be record moguls point to EMI's relative weakness in the important US market, arguing that the business is under-performing. Whether that is just spiteful record industry tittle- tattle or a more substantive criticism of EMI's management will be revealed only if a bidder emerges.

One of the problems EMI faces is that the dynamics of the record industry are not readily understood. The pounds 2bn or so which has been added to Thorn EMI's value in the last year only came about after US interest in the music business was uncovered. The company has therefore had to spend time not only on the complexities of hatching the demerger but also on a rapid educational programme setting out the industry's profile and EMI's place within it.

Its prime strength is in its diversity in terms of business streams, geography, genre and artists. Although EMI would not underestimate the importance of the US, it argues that the US share of world sales is declining. National markets are becoming increasingly important so under-exposure to the Anglo-American repertoire, so long the bedrock of the music business, should work to EMI's advantage in the longer run.

With or without a bid, EMI will remain a world class company. In Sir Colin Southgate it is blessed with a chairman who has demonstrated a clear commitment to shareholder value. When EMI is demerged, it will represent not the beginning or the end but merely the continuation of a process of adding value that has been Sir Colin's hallmark in his 11 years at the helm.