UK - Trade and Industry Secretary Patricia Hewitt last week announced that shareholders are to be given the right to an annual vote on directors' pay, in a move that will strengthen links between pay and performance in the boardroom.
She said: Our companies have to be able to attract and retain the best executives in the world and we support top-class pay for top performances.
But all too often directors are lavishly rewarded for lack-lustre or even poor performances. We share the view of many shareholders that this is simply unacceptable and goes against the interests of the company, its shareholders, and the UK as a whole.
That is why I am taking action to strengthen the corporate governance framework for boardroom pay. Today's measures will require quoted companies to hold annual shareholder votes on directors' pay and further build on the proposals outlined earlier this year aimed at improving accountability and transparency of directors' remuneration.
The proposals mean that quoted companies will be required to:
* Publish a report on directors' remuneration as part of the company's annual reporting cycle
* Disclose within the report details of individual directors' remuneration packages, the role of the board's remuneration committee, and the board's remuneration policy as well as specific requirements relating to the disclosure of information onperformance, and;
* Put an annual resolution to shareholders on the remuneration report.
The Government will introduce secondary legislation to implement these new requirements in the coming Parliamentary session. The Department of Trade & Industry (DTI) will publish a consultation document before Christmas inviting comments on the draft regulations.
PIRC, the corporate governance consultancy that advises a third of local authority pension schemes, welcomed the DTI’s decision to require companies to seek annual shareholder approval for directors’ remuneration along with improved disclosure.
Stuart Bell, PIRC research director, said: ‘We have been arguing for a shareholder vote on pay since 1993. We are delighted that the logic of this position has been recognised. Giving shareholders a direct say is the only way of overcoming the conflict of interest faced by boards in determining their own remuneration. It is an essential element of corporate accountability.”
Belinda Hudson, European principal at William M Mercer, said: Remuneration committees may be influenced by the potential effects of a negative vote, but the impact is likely to be limited. Such votes would only be ‘advisory’.
Most importantly, a shareholder vote on remuneration reports would be looking in the rear view mirror at a historical document. In practice, shareholders will have limited influence over remuneration packages already established as entitlements through employment contracts.
Potentially more effective would be the ability to vote on companies' changes in remuneration policy, which would be more forward-looking. Such policies might include, for example, important shifts in the proportion of fixed and performance-related pay within executive remuneration packages.
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