UK: directors' bonuses and gender differences

The UK's Financial Times newspaper has reported (online, 25 August), that "Female directors earn smaller performance-related bonuses than male counterparts, according to a new study that says the disparity reflects sexist attitudes. Researchers at Exeter university found that male executive directors in the best-performing companies were paid bonuses 263 per cent bigger than those working for the worst performers. For female directors the difference is a mere 4 per cent".

Belgium: corporate governance code - proposed changes

Belgium's Corporate Governance Committee has proposed several changes to the Belgian Corporate Governance Code. A consultation paper is available here (in Word format) and a draft of the new code is available here (also in Word format). The proposed changes address a wide range of areas including corporate social responsibility, the gender diversity of boards, board evaluation, directors' remuneration and the remuneration report. 

Europe: bankers' bonuses and remuneration at listed companies

Yesterday's vote by the European Parliament on new rules governing bankers' bonuses - about which see here and here - has attracted a great deal of coverage in the media. Less attention has focussed on another resolution supported by MEPs yesterday regarding remuneration in listed companies, described in the relevant press release as follows:

.... in a non-legislative resolution drafted by Saïd El Khadraoui (S&D, BE), Parliament calls for remuneration policy principles to be extended to cover all companies listed on stock exchanges. It proposes that listed companies be required to explain their remuneration policies if their directors' pay is deemed not to follow certain principles aimed at removing incentives to take excessive risk or to take decisions based on short-term considerations. The resolution also proposes that shareholders be given greater control over the directors of a listed company.

Finally, 'golden parachutes' handed to directors in cases of early termination should be limited to the equivalent of two years of the fixed component of the director's pay and severance pay should be banned in cases of non-performance or early departure, says the resolution, which was adopted by 594 votes to 24 with 35 abstentions".

Germany: corporate governance developments

A the end of June, at the 7th German Corporate Governance Code Conference, Dr. Gerhard Cromme delivered his final speech as chairman of the Government Commission on the German Corporate Governance Code. In his speech, Dr Cromme discussed the development of the Code - widely known as the Cromme Code - and reflected on the German two-tier board model and issues associated with the transparency of business decisions and executive pay.  Regarding the latter, Dr Cromme observed:

In connection with cases of excessive severance payments, there were calls to shorten the term of management board contracts from five years to, say, three years. This would have limited the amount of potential several payments without introducing a severance payment cap. However, we came to the conclusion that the five-year term of office is the greater good - for reasons of planning and reliability alone, but also in the interest of a long-term corporate strategy. Only first time appointments should generally be made for a shorter term. Instead of shortening management board contracts, we introduced suggestions on the severance payment cap in 2007. At the start of this month we took this a logical stage further and upgraded the suggestions to recommendations. This means that non-compliance with this rule has to be disclosed in the annual declaration of conformity. This is transparency which will bear fruit in the long-term and change patterns of behaviour".

Further information about the recommendation on severance pay is available here and a video of the conference is available here. Interestingly, the UK's Financial Times newspaper has reported, in a piece titled "Berlin plans to curb excessive executive pay" (online edition, July 10):

Berlin is poised to crack down on what it considers 'excessive' executive pay in a move that could curtail the use of stock options in Germany. The Christian Democratic Union of Chancellor Angela Merkel has set up a working group that will start work in September on concrete proposals. These are likely to include a tightening of corporate governance rules and corporate taxation possibly as soon as the end of this year. The proposals, to be finalised in the autumn, are likely to make it into law since the CDU has the support of its coalition partner the Social Democratic party. The CDU initiative is intended to target DAX-listed companies, but would also affect executives of foreign companies who live in Germany".

NB:

[1] In the UK, under Section 188 of the Companies Act (2006), directors' service contracts exceeding 2 years (or those with any fixed or rolling notice period exceeding 2 years) require shareholder approval. This provision applies to all companies.

[2] The UK Combined Code on Corporate Governance (June 2008) provides:

B.1.6 Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.

Australia: shareholder engagement and participation

On June 23, Australia's Parliamentary Joint Committee on Corporations and Financial Services published a report titled Better shareholders – Better company: Shareholder engagement and participation in Australia. The Committee considered several issues including the barriers to effective engagement by shareholders in the governance of companies, the engagement of institutional shareholders and the selection of directors. The report makes many recommendations including:

• ASIC should establish best practice guidelines for company annual general meetings and for clear and concise company reporting.
• The government should investigate an alternative regulatory framework for small incorporated companies and not-for-profit organisations.
• The government should investigate the most appropriate regulatory framework for ensuring that stock lenders retain the voting rights attached to the lent shares.
• The government should amend the Corporations Act to exclude shareholder directors from voting on their own remuneration packages either directly or by directing proxies

The Australian Government has welcomed the report: see here.

Executive pay

Several recent posts on this blog (here and here, for example) have highlighted the debate about executive pay in America and Europe. This debate is considered in a couple of articles in this week's Economist. In the first, "Let the fight begin", it is argued that shareholder "say on pay" votes should become the norm and are preferable to Government intervention (it would be surprising if The Economist argued otherwise). In the second, "Pay attention", there is discussion of the debate about executive pay in Europe and the development of "say on pay" rules within the European Member States. The article notes:

By law in the Netherlands, Sweden and Norway, shareholders get a binding vote on compensation packages; in Britain they get a non-binding vote. Some Spanish and Swiss firms are voluntarily starting to offer shareholders a vote".

USA: McCain supports mandatory say on (CEO) pay

Corporate governance issues continue to feature in the race for the presidency of the United States of America. Republican Senator John McCain has joined the debate concerning executive pay in a speech delivered yesterday at the NFIB & eBay 2008 National Small Business Summit held in Washington, D.C. Senator McCain observed:

In times of hardship and distress, we should be more vigilant than ever in holding corporate abuses to account, as in the case of the housing market. Americans are right to be offended when the extravagant salaries and severance deals of CEO's -- in some cases, the very same CEO's who helped to bring on these market troubles -- bear no relation to the success of the company or the wishes of shareholders. Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road. If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders"

UK: financial services regulation - future direction outlined by FSA chairman

Yesterday the Financial Services Authority chairman, Sir Callum McCarthy, delivered a speech titled "Financial Services Regulation in the UK". Sir Callum provided a strong defence of the regulatory structure governing financial services in the UK and observed:

The principles which have underpinned the regulatory framework in the UK for the last decade remain good principles, which we would depart from at our peril and to our cost"

He nevertheless identified areas in which the FSA needs to improve, including the better application of the principles in practice and greater attention being given to firms' incentive structures (although Sir Callum explained that the FSA has "no part to play in assessing or influencing individual bonuses or individual remuneration"). Sir Callum also made clear that the FSA would press ahead with changes to the UK liquidity regime and noted that "unless there is a step change in the speed with which the Basel Committee progresses international agreement, regulators will be forced to deal with this on a national level".

Europe: Commission Recommendation on limiting auditors' liability

The European Commission has issued a Recommendation concerning the limitation of auditors' liability in respect of the statutory audit of the accounts of a company which is registered in a Member State and the securities of which are admitted to trading on a regulated market in a Member State. The Recommendation provides:

• The civil liability of statutory auditors and of audit firms arising from a breach of their professional duties should be limited except in cases of intentional breach of duties by the auditor. 
  
• The limitation of liability should apply against the company audited and any third party entitled under national law to bring a claim for compensation. 
  
• Any limitation of civil liability should not prevent injured parties from being fairly compensated. 
  

The Recommendation provides that any of the following methods can be used by Member States:

• establishing a maximum financial amount (or a formula for the calculation of such an amount).
  
• establishing principles by virtue of which the auditor is not liable beyond its actual contribution to the loss suffered and is accordingly not jointly and severally liable with other wrongdoers.
  
• permitting the auditor and company being audited to determine a limitation on liability through agreement.

For further information see the following documents published by the Commission: executive summary, impact assessment, press release and frequently asked questions. 

NB: In the UK, Section 534 of the Companies Act (2006) permits auditors to enter into a "liability limitation agreement".  This is an agreement "that purports to limit the liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust, occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company".  To be valid, such agreements must comply with Section 535 and must be authorised by the company's shareholders under Section 536. 

USA: proposed Bills - beneficial ownership and executive pay

As the Democratic candidates' race for the presidency draws to a close, it's worth noting a couple of corporate governance related Bills introduced to Senate earlier this year by Hillary Clinton and Barack Obama.

Senator Obama - along with Senators Levin and Coleman - introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 2956).  The purpose of the Act, to quote directly from it, is "[to] reduce the vulnerability of the United States to wrongdoing by United States corporations and limited liability companies with unknown owners". The Act will require corporations and limited liability companies formed within the States to provide the State of incorporation with the identity of the corporation/ company's beneficial owner(s). A "beneficial owner" is defined as "an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company".

Senator Clinton introduced the Corporate Executive Compensation Accountability and Transparency Act (S. 2866).  Section 4 provides shareholders with a mandatory "say on pay" vote at the company's annual meeting.  In Section 5 the Bill contains measures designed to deal with the potential conflicts faced by remuneration consultants.  

Netherlands: changes proposed to the Tabaksblat Code

The Dutch Corporate Governance Monitoring Commission has proposed changes to the Dutch Corporate Governance Code (a.k.a. the "Tabaksblat Code"). A summary in English is available in a Word document here. This document also contains the results of a survey of Dutch institutional investors' perceptions of corporate governance in Dutch companies. Many of the changes concern remuneration. The proposed additions to the Code include the following rules:

If a variable remuneration component (shares, options or a bonus) conditionally awarded in a previous financial year would, in the opinion of the supervisory board, produce an unfair result on account of incorrect financial data or special circumstances in the period in which the predetermined performance criteria have been or should have been achieved, the supervisory board may adjust the value downwards or upwards. This power of the supervisory board shall in any event be included in new remuneration contracts with management board members.

If the remuneration committee uses the services of a remuneration consultant, that consultant should not provide advice to any management board member.

The supervisory board should aim to have a diverse composition in terms of age and gender.

For further information see this press release (in Word format).

Update (15 September 2008): The ICGN has published a letter in which it comments on the proposed changes. 

Australia: Large cap companies' corporate governance compliance

The 2008 BDO Kendalls large-cap corporate governance survey has been published. Amongst the findings are the following (to quote from BDO Kendalls' press release):

Australia’s largest publicly listed companies generally meet all aspects of best practice guidelines for corporate governance; however full independence still remains a key issue for some major companies.

Areas highlighted included some companies having audit, remuneration or nomination committees that were either not made up of all independent directors or the chair was not independent. The survey findings are based on the 2007 annual report disclosures of the 20 largest Australian listed companies by market capitalisation as at 13 March, 2008.

Several companies (15%) were also found to be paying a high proportion of non-audit fees to their statutory auditors. News Corporation and Newmont Mining were the only companies not to have a formal Share Trade Policy. Also, 40% of the top 20 companies did not have a dedicated Risk Management Committee.

However, despite some of the largest caps needing to improve in certain areas, the broad finding for Australia’s biggest listed companies is that their corporate governance structures are robust and in most areas meet best practice guidelines.

For further information click here. For further information about corporate governance in Australia, see here. For BDO Kendalls 2007 mid-cap corporate governance report, see here.

France: executive pay

The Financial Times has reported, in an article titled "France eyes curbs on executive pay" (published online, 29 May):

The French government on Thursday threatened to take further action to curb pay for bosses of poorly performing companies, calling recent rises for some executives 'perfectly scandalous'.  Christine Lagarde, finance minister, called on employers to ensure that remuneration for their top managers reflected the company’s performance, suggesting further legislation if they failed to do so.  The French government intends to use its presidency of the European Union, which begins in July, to press for EU-wide rules governing executive pay, officials said, arguing that there was a head of steam building among finance ministers for a Europe-wide clampdown"

For information about the European Commission's past work on directors' remuneration, see here. Note also this earlier post.

UK: Directors' pay and bankers' bonuses

The Financial Services Authority's chief executive, Hector Sants, delivered a speech yesterday evening (at the Investment Management Association's AGM dinner) in which he considered recent market events and the FSA's response. Of particular interest are his comments concerning remuneration structures:

I feel that it is also worth taking some time here to consider the effects of incentive and remuneration structures. As I have said before, it is important for Boards to recognise that having asymmetrical structures where employees receive immediate reward and do not bear the consequences of losses is a risk to shareholders. I do, therefore, believe that firms should focus on minimising this risk by ensuring, as far as possible, the structures ensure employees and shareholders both share in the risk, in the upside and the downside.

There are various ways of achieving this goal, such as deferred compensation with claw back and the increased use of share options. None, however, is perfect, but I do believe Boards and shareholders need to carefully consider the incentive structures in place in their companies and their propensity to encourage risk. I know many of you already do this, but I ask you to increase your focus on this critical issue.

From the regulatory point of view, it is not our role to dictate the quantum of individual remuneration, that is for the market, but we do need to consider the implication of remuneration structures when judging the overall risk of individual institutions. We will do this with increased intensity.

Away from London, Royal Dutch Shell plc held its AGM yesterday. Remuneration proved a controversial issue. As reported here in the Financial Times:

One in three Royal Dutch Shell shareholders at the oil company's annual meeting yesterday voted against plans to award three executives one-off bonuses worth about €1m ($1.6m) to stay in their jobs. The vote adds to a growing chorus of dissent over so-called "retention payments", in which managements at some of the UK's most venerable companies have felt the wrath of investors in recent weeks".

It should, however, be noted that many shareholders withheld their votes; the results were:

• Votes for: 1,517,884,288
  
• Votes against: 706,398,270
  
• Votes withheld: 776,213,431 
  

UK: the Punch Taverns plc AGM - shareholders reject remuneration report

Punch Taverns plc held its annual general meeting earlier this week. The voting results are available here. Resolution 3 - to approve the company's remuneration report - was not passed: 55.44% of votes were cast against. The company's board responded by issuing a statement in which it explained that a "full review of remuneration policy and its future implementation" would be conducted in consultation with shareholders. Perhaps the shareholders should have been consulted earlier, not least because at the company's last annual general meeting, in January of this year, disquiet over remuneration was evident: approximately one third of votes were cast against the remuneration report. 

UK: AIM Rules amendments - remuneration disclosure and electronic communication

The London Stock Exchange has published AIM Notice 35, in which amendments to the AIM Rules are proposed. It is proposed to amend AIM Rule 19 to require AIM companies to provide disclosure of directors’ remuneration in their annual audited accounts (coming into force for financial years ending on and after 31 March 2010). It is also proposed to amend the guidance notes to AIM Rules 14 and 19 to provide all AIM companies with the option to use electronic communications to send accounts and admission documents to shareholders. 

Europe: Executive pay

Executive pay was discussed at this week's meeting of the European finance ministers. In a report published in International Herald Tribune it is stated:

For the first time, the finance ministers pledged to consider steps to rein in bonuses for executives that are deemed 'excessive'. Dutch Finance Minister Wouter Bos explained how his government plans to discourage such payments with a 30 percent tax for companies that shell out €500,000 (US$772,000) or more to get an executive out the door. Bos said concern was expressed by all EU finance ministers about the size of so-called 'golden parachute' payments and other executive bonuses that have been making headlines. 'There is a general commitment of us all that this is a subject that we have to take a serious look at,' Slovenian Finance Minister Andrej Bajuk, the meeting's chairman, told reporters.

The International Herald Tribune has reported on the Dutch proposals here. For further information about the European Commission's work on executive pay, see here.

NB: In 2002, the UK introduced the Directors' Remuneration Report Regulations which required quoted companies to provide shareholders with an advisory vote on the Remuneration Report (see, now, Section 439 of the Companies Act (2006)). Recent research suggests that this change has contributed to the higher sensitivity of CEO cash and total pay to negative operating performance. See: Maber, D. and Ferri, F., "Solving the Executive Compensation Problem Through Shareholder Votes? Evidence from the UK", available on SSRN here.

UK: Lib Dems - "A New Deal for the City"

The UK Liberal Democrat Party has today published a manifesto titled A New Deal for the City, which outlines proposals for the reform of financial regulation. With regard to the role of the Bank of England and the FSA, the manifesto states:

"One lesson from the past is that there has to be a clearer line of responsibility in crisis situations. We would argue that the Bank of England should have primary responsibility, ultimately accountable to Treasury Ministers, and the FSA could be a freestanding agency within and subordinate to the governance structure of the Bank".

With regard to corporate governance, the manifesto states:

"There is a need for reform in the City to stop entrepreneurs' natural animal spirits creating a culture of greed and gambling. One route is through strengthened corporate governance arrangements under which senior executive pay packages are subject to shareholder approval at AGMs (and not just scrutiny, as at present) though this approach would be helpful only for PLCs and there are many institutions which contribute to systemic risk".

US: Say on pay - a first in America

The first "say on pay" vote on executive pay has taken place in America. Aflac - an insurance company - explained in its Annual Report why its board decided to provide shareholders with an advisory vote on directors' pay:

"We have a responsibility to listen to our shareholders, as they have placed their trust and financial resources in Aflac. After all, they own the company ... our shareholders have the right to know how executive compensation works, and ... we should provide a meaningful way for shareholders to give us input on our compensation practices. It’s as simple as that. Our shareholders tell us that we’re a very transparent and responsive organization, and Say-on-Pay is consistent with that approach. Our board of directors unanimously agreed. And we are proud to be the first company in the United States to adopt a resolution giving shareholders this type of advisory vote on compensation".

Over 90% of the votes cast supported the company's remuneration policy. For further information, see the following articles: The Wall Street Journal, The Financial Times, The Guardian. Senators McCain and Obama have criticised the level of directors' pay during their campaigns: see here.

US: CEO pay

The results of the Wall Street Journal & Hay Group CEO Compensation study have been published. In Hay's press release it is stated:

"The year 2007 marked a major milestone in the history of CEO pay, according to the study. For the first time, performance-based plans overtook stock options as the most popular form of long-term incentive compensation, with 129 of the companies using a performance plan, up 5% from 2006. The two more traditional equity vehicles of stock options and time-vested restricted stock showed significant declines in 2007, with options declining 7% to 128 companies, and time-vested restricted stock plans declining 14% to 63 companies. Performance plans tie the level of a CEO’s pay directly to how the company performs relative to key business goals and strategic priorities. In most plans, if the company fails to achieve a certain level of performance, the awards will be worth nothing to the CEO ... The 2007 study focused on 200 companies with more than $5 billion in annual revenue that filed their proxy statements after October 1, 2007".

Elsewhere, research has been published exploring how compensation consultants influence the level and pay-performance sensitivity of CEO pay in America. The research - by Cadman et. al. and published here on SSRN - looked at a sample of 880 firms from the S&P 1500 for the fiscal year 2006. The authors state, to quote directly from their abstract on SSRN:

"We find evidence of greater compensation in the presence of a compensation consultant, consistent with theory that these consultants facilitate rent extraction. However, we find no evidence of less pay-performance sensitivity when compensation consultants are hired. Among firms that retain consultants, we also examine whether there is greater rent extraction for clients of consultants with potentially greater conflicts of interest. Using a variety of specifications, we are unable to find widespread evidence of more lucrative CEO pay packages for clients of conflicted consultants despite anecdotal evidence to the contrary. Overall, we conclude from our findings that the potential conflict of interest between the firm and consultant is not a primary driver of excessive CEO pay."

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NB: For a survey of directors' pay within UK FTSE350 companies, see KPMG's report "Directors' Compensation 2007", available here (you may need to provide your name, postal address and e-mail address to view the report).