Directors’ remuneration: proposed amendment regulations

29 09 2012

Lucian Bebchuck and Jesse Fried’s seminal study Pay without Performance: The Unfulfilled Promise of Executive Compensation and similar critiques have killed stone-cold the argument that arm’s-length contracting works: the argument has not been resurrected and it is widely accepted that in the corporate sector pay remains decoupled from performance. For Bebchuck and Fried – both professors of corporate law at Harvard University – management can easily manipulate directors and, rather than creating value for the company, everyone is more interested in personal gain at the cost of the company.

From this perspective “market forces are neither sufficiently finely tuned nor sufficiently powerful to compel” the conventional view of corporate governance which assumes that executives will be rewarded for performance and not failure. It is therefore not surprising that in order to win voters’ support, governments everywhere in Europe are making promises to reform the dynamics of the pay and power equation.

The Secretary of State for Business Innovation and Skills (Mr Vince Cable, “the business secretary”) is keen to be seen as a promoter change in the business world and is hence proposing reform which strengthens shareholder democracy and promote the public interest.

In order to achieve better results the business secretary has consulted on the draft Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2012, made pursuant to section 421 of the Companies Act 2006 (CA 06). Regulation 3 substitutes the schedule to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and regulation 2 amends regulation 11 of the 2008 Regulations.

Under paragraph 4 the new schedule proposes a table which demands more information about how directors are rewarded – for each person who has served as a director of the company at any time during that year – for the relevant financial year: a “Mock-up policy table setting out all elements of remuneration”, Annex A, pp 39 – 40) and the draft regulations (Annex B, pp 41 – 51) are available in the Department for Business Innovation and Skills document Consultation on revised remuneration reporting regulations June 2012. The deadline for written submissions expired on 26 September 2012 and the consultation questions are extracted below (the responses will, no doubt, make very interesting reading):

  • Question 1: The Government seeks comments on how well the draft regulations attached at Annex B give effect to the policy set out in this consultation document.
  • Question 2: What costs will companies face in adjusting to these revised reporting regulations?
  • Question 3: The Government intends to introduce a table which sets out the key elements of remuneration and supporting information on the pay policy. The Government does not propose to prescribe the specific disclosures that are required for each element of pay. Is this a practical and informative approach?
  • Question 4: The Government intends to introduce reporting requirements on service contracts, what remuneration directors can receive in different scenarios and the percentage change in profit, dividends and overall expenditure on pay in the reporting period. Is this a practical and informative approach? If an alternative disclosure would be useful, please give details.
  • Question 5: The Government proposes that a company’s statement on its approach to exit payments sets out the principles on which the determination of the payment will be made. If additional information would be useful, please give details.
  • Question 6: The Government would welcome views on the proposal for the policy part of the remuneration report to include a statement on whether and if so how a company sought employee views on the remuneration policy.
  • Question 7: The Government’s intention is that the single total figure includes remuneration that becomes receivable as a result of the achievement of conditions relating to performance in the reporting year where the reporting year is the last year of the performance cycle. Do the specific disclosures set out in the table on page 24 correctly give effect to this intention?
  • Question 8: The Government proposes the application of the HMRC methodology to work out the value of defined benefit pension schemes. Is this a practical and informative approach?
  • Question 9: The Government proposes that claw-back is recorded as part of the single figure. Is this a practical and informative approach?
  • Question 10: The Government would welcome views on whether it would be commercially sensitive to require companies to publish full details of performance against metrics. If so, how can an appropriate degree of flexibility be achieved?
  • Question 11: Will the Government’s proposed disclosure requirements on pensions lead to reporting of sufficient information on the benefits received by directors?
  • Question 12: The Government proposes that scheme interests awarded to directors during the reporting year are disclosed at face value. Is this a practical and informative approach?
  • Question 13; The Government proposes to simplify the reporting requirements regarding directors’ interests. What are the costs and benefits of this approach? If an alternative disclosure would be more useful, please give details.
  • Question 14: The Government proposes that the remuneration report includes a graph that plots total shareholder return, as a proxy for company performance, against CEO pay. Do you agree that this graph would be useful? If so, do you agree that total shareholder return and CEO pay are the best proxies for company performance and pay? If not, what measures would be more appropriate?
  • Question 15: The Government proposes that the single figure, detail of performance against metrics, total pension entitlements, exit payments made and detail on variable pay are all subject to audit. Are there any other sections of the report that should be subject to audit?

The full BIS consultation document, setting out the proposed amendments in draft form, is available in Scribd below. In other interesting news Odyssey Entertainment Ltd v Kamp & Ors [2012] EWHC 2316 (Ch) is a big case on section 172 (Duty to promote the success of the company) of the CA 2006 and I hope to post on it sometime in the near future. Moreover, in other news, the final report of the Wheatley Review of Libor was published yesterday. Furthermore, the Financial Reporting Council has published the UK Stewardship Code – September 2012UK Corporate Governance Code – September 2012 and the Guidance on Audit Committees – September 2012.


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7 01 2013
British Call For Executive Bonus Regulation - Pilant's Business Ethics

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7 01 2013

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