Shareholder Democracy, Corporate Governance and Future Reform

25 09 2012

Writing on the corporate governance blog earlier this month, Bob Tricker observed that “serious”  interest in corporate governance is a recent phenomenon which only came to the fore following Sir Alan Cadbury’s 1992 Report. The dichotomy is that despite the existence of regulatory bodies such as the US Securities and Exchange Commission since the mid-1930s, it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and regulation.

For Tricker, corporate governance  – to which constructs such as marketing, production, finance, operations research, and management information systems have only recently ceded ground – is quickly becoming the focus of a company’s organisational chart. Themes such as the board of directors, executive directors’ remuneration and their relationship with management are all now very much at the apex of the debate about issues such as shareholder democracy, accountability and transparency in the corporate sphere. It is often said that good corporate governance is about promises kept: Macey, Corporate Governance: Promises Kept, Promises Broken (2010). Conversely, bad corporate governance is considered “promise breaking behaviour”.

The UK – which is seen as a “laboratory” for shareholder activism – has high rates of executive remuneration and on average bosses earn seventy five times more than workers.

A consultation paper on a proposed legislative framework aimed at giving shareholders greater influence on the issue of executive remuneration was published in March 2012 by the Department for Business, Innovation and Skill (“BIS”).

The following proposals are in the pipeline: (a) an annual binding vote on future remuneration policy; (b) increasing the level of support required on votes on future remuneration policy; (c) an annual advisory vote on how remuneration policy has been implemented in the previous year; and (d) binding vote on exit payments over one year’s base salary.

The Secretary of State for Business Innovation and Skills Mr Vince Cable (“the business secretary”) wants to hold companies to account by introducing a binding pay vote from shareholders but he has ditched his original idea of a supermajority of 75 per cent support for pay plans to get approved. Binding shareholder votes are to be held once every three years. Moreover, the UK’s independent corporate governance regulator the Financial Reporting Council (FRC) wants to simplify remuneration reporting by the introduction of a single “total pay” sum that shareholders were able to follow.

In light of the scandalous inequity in levels of pay between bosses and workers, the business secretary has committed himself to introducing change through Part 6 – Clause 57: (Directors’ remunerations: effect of remuneration report) – of the Enterprise and Regulatory Reform Bill (“ERRB”) which deletes section 439(5) of the Companies Act 2006 (“CA 06”). The changes, which are expected to come into force in the spring of 2013, are presently under consultation.

Presently, under section 420 CA 06, quoted companies are required to produce a directors’ remuneration report which must be put to the company’s members at the annual general meeting where shareholders can, pursuant to section 439, approve the report by an ordinary resolution. However, the resolution is advisory and the company is not under a legal obligation to take action in light of the vote. Hence, the vote is of no consequence in practice and directors’ remuneration is not conditional on shareholder voting.

Clause 57’s repeal of section 439(5) CA 06 – under which “no entitlement of a person to remuneration is made conditional on the resolution being passed by reason only of the provision made by this section” – removes the present statutory requirement preventing a vote on the directors’ remuneration report having the effect of making directors’ entitlement to remuneration contingent on the outcome of the shareholder resolution.

So deleting section 439(5) is not a panacea and the explanatory notes to the ERRB, paragraphs 427 and 428, shed light on the situation:

  • The repeal of this section does not automatically have the effect of making directors’ remuneration contingent on the outcome of the shareholder resolution on the directors’ remuneration report. As such, therefore, the repeal of section 439(5) does not, in itself, mandate a binding vote on the directors’ remuneration report.
  • It will be possible for the shareholder resolution to be given that effect where the articles of a particular company state that this is to be the case. To change the articles of a particular company in order to introduce a binding vote on the remuneration report would require the approval of shareholders of that company by means of a special resolution.

More updates will follow on this theme. Some insight can be gained in relation to the issues of executive remuneration through the findings of GMI Ratings in Europe’s Shareholder Spring: Shareholder Discontent with Executive Remuneration which sheds light on the pay debate by examining the issues in five cases (Aviva, Cairn Energy, Trinity Mirror, UBS and WPP Group). Essentially, the findings of the report can be extracted as:

(1) 24 companies in Western Europe received a significant vote against their pay plans as of the date of the initial data analysis

(2) The average “against” vote in this group was 40 per cent and the median was 34 per cent

(3) Some companies are dealing with protest votes for two years running, such as easyJet plc and WPP, while one company, UBS, has seen pay unrest for at least three years

(4) Although some votes are against pay plans and/or increases in general, some are against specific payments such as:

• top-up bonus at Smiths Group

• retention bonuses at Xstrata

• sign-on payments at UBS

(5) Some votes have led to CEOs resigning, as at Aviva

(6) At some companies the exit packages paid to CEOs were the focus of protest votes, as at AstraZeneca and Trinity Mirror

Some of the other observations in the report include:

  • Aviva’s boss Andrew Moss received a total realised compensation of £2,748,172 and £3,985,608 in 2010 and 2011 respectively. In 2012, 58.6 per cent of the non-binding votes cast opposed the remuneration report which made Aviva the fourth FTSE 100 company to have its remuneration report rejected and Moss – despite his attempts at pacification by keeping his base salary under £1 million – resigned on 8 May. Aviva has a “D” rating for pay in its home market. This caused the group’s shares to plummet by 21 per cent during 2011.
  • Cairn Energy got an “F” rating for pay in its home market: its former CEO Sir Bill Gammell who then became chairman received a total realised compensation of £8,365,081 (2010) and £7,321,247 (2011); the current CEO Simon Thomson received a total realised compensation of £5,382,270 and £4,266,778. A payment to Gammell to compensate him for his switch from CEO to non-executive Chairman. Again, bad governance destroyed value in the company and its shares declined in value. More than 10 per cent shareholders voted against Gammell’s re-election to the board as the new chairman.

Other interesting details in the report – available below – are well worth a read.


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3 04 2014

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