20 Jun 2012

Will new powers for shareholders rein in executive pay?

Business Secretary Vince Cable publishes plans to give shareholders more power over directors’ pay and remuneration packages, but are they tough enough?

The Business Secretary unveiled the government’s plans which will force UK-incorporated companies to reveal more details on directors pay and to give more voting power on pay packages to shareholders.

Government proposals follow a series of shareholders revolts over pay earlier this year which led to the departures of FTSE 100 chief executives at firms such as Aviva and Astrazeneca.

Mr Cable said this afternoon: “At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.

“In January we kicked off a national debate aimed at encouraging shareholders to become more actively engaged as company owners in better aligning directors pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained.”

The main planks of the proposals are that:

Shareholders are granted binding votes on companies’remuneration which will take place at least every three years.
Companies will have to report a single figure for the total pay directors received for the year.
Companies are forced to publish a statement of payments to a director when they exit the company.

So are the plans tough enough?

Under the current rules, votes by shareholders are not binding so, in theory, companies can ignore them.

Proposals that the government published in March suggested a binding vote on shareholder pay should take place every year.

But the latest plans will mean when a remuneration policy is unchanged, a vote must only be held every three years. A binding vote will only take place annually if a company changes its pay package policy.

Labour’s Shadow Business Secretary, Chuka Umunna MP, called the latest proposals an embarrassing climb-down:

“At a time when shareholders are becoming more assertive and engaged, the government is failing to do all it can to empower them to hold boards to account and act as a check against excess and rewards for failure. Now is not the time to be rowing back from reform, and Labour has called for ministers to go further.”

Kit Bingham, partner and head of the chair at executive recruitment firm Odgers Berndtson:

“It’s all pretty sensible. It’s a sound plan (the three year binding vote) – shareholders already have a lot of potential influence already.

“It doesn’t do anyone any good to have this battled out every year.

“The problem has been that shareholders have not seemed willing to have that battle. All that government can do is give them the tools.”

Another area where Mr Cable has backed down is on voting thresholds. The department had previously consulted on increasing the amount of votes needed to endorse a pay package to 75 per cent.

Vince Cable letter

Even though major shareholders including Fidelity and Legal & General Investment Management had backed calls for the 75 per cent threshold, a spokesman for BIS said the idea had been dropped because of concerns it would give more power to rebel shareholders.

On Wednesday the employers organisation, the CBI, wrote to Baroness Hogg, chair of the Financial Reporting Council, strongly opposing the 75 per cent threshold, and instead calling for changes to the corporate governance code in order to encourage companies to publicly report any significant opposition by shareholders to a remuneration package.

Speaking in the House of Commons, Chuka Umunna criticised Mr Cable for “continually standing in the way” of making it a requirement that employee representatives sit on company remuneration committees.

The government aims to have the new powers in place by October 2013, and will shortly bring forward amendments to the Enterprise and Regulatory Reform Bill which is currently before Parliament.