All about cash? – Executive Remuneration

The remuneration of directors is a sensitive issue for directors, investors and the general public.  Newspapers revel in publicising directors' huge bonuses, especially when those directors are responsible for raising the prices of key public facilities above the base rate of inflation.  Excessive remuneration of top level staff clearly damages the reputation of companies and the morale of the staff; it is a balance between visibly recruiting and keeping the best people in the job, whilst not appearing to disproportionately line senior pockets with platinum.  

          Directors may quell some criticism if they follow the International Corporate Governance Network's ("ICGN") new guidelines on the remuneration of executives and directors.  The guidelines aim to ensure that remuneration is in the best interests of the shareholders and investors, thereby meeting the fiduciary duties of the directors.   

          The guidelines set out general principles that reflect best international practice. It is not yet clear how effective they will be as the ICGN admits they are simply a communication tool.  The ICGN believes remuneration programs should be carefully designed and implemented in accordance with the unique situation of each company. There are three principles which underpin the new guidelines:

• transparency, so investors can clearly understand the remuneration program and can see total pay;
• accountability, to ensure boards maintain the proper levels of remuneration by representing owners and by obtaining shareowner approval of a remuneration report; and
• performance-based, so remuneration programs are linked to relevant measures of company's performance over an appropriate timescale.

These guidelines help fill the void left open by statute, and unexplored by common law.  Common law is more concerned with the failure to fully disclose all remuneration and to calculate it correctly, than with the method of calculating what it should be.  Statute on directors' remuneration originates from the Directors' Remuneration Report Regulations 2002 (SI 2002/1986).  These insert provisions into the Companies Act 1985 in sections 232 (requiring disclosure in notes to accounts of emoluments and benefits of directors and others), 234B and 234C (duty to prepare directors remuneration report, applying only to directors of quoted companies; and approval and signing of directors' remuneration report).  There are also a number of minor referrals to directors remuneration in the Companies Act 1985 such as in sections 235 (Auditor's report), 237 (Duties of Auditors) and 241 (laying of accounts in a general meeting).

          Whether UK companies implement the ICGN guidelines will depend on how public and accountable those companies are or intend to be.  Any company intending to make shares publicly available on an official list would be wise to follow these guidelines and the guidelines in the Combined Code, especially where remuneration for any period in the past may be perceived as excessive.  The driver for directors is that if their actions are called into question, they can refer to the guidelines as evidence of compliance with best practice.

           Corporate Blawg UK asks whether these guidlines are sufficient to protect investors?  The Company Bill (of 20 July 2006) requires any director's service contract lasting longer than 2 years to be approved by the members (s.189).  This will mean either a greater degree of transparency in  service contracts, or shorter service contracts of directors.  Corporate Blawg UK would be interested to hear your views....

Comments

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