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. 

UK: the Tesco plc AGM

Tesco plc held its annual general meeting last Friday. Whilst the advisory vote on the remuneration report was passed a little under half of the shareholders failed to support it. 52.9% of votes were cast in support of the report, 31.9% against and the remainder were withheld. A significant rebuke. The votes results are available here.

Hong Kong: Companies Ordinance Rewrite - second consultation phase launched

The second consultation phase for the Companies Ordinance Rewrite began today and will last until 6 August 2010. A consultation paper has been published - see here (pdf) - along with parts of the draft Companies Bill (see here). A full list of the phase two consultation questions is available here (pdf).

The Xstrata plc annual general meeting

The Xstrata plc annual general meeting was held yesterday in Switzerland (the company's shares are listed on the London and Swiss Stock Exchanges). Much attention was focused on resolution 3 - the approval of the company's remuneration report - given the controversy over remuneration policy at the company. Just over 70% of shareholders voted on this resolution and of those 31% voted against the report. This is noteworthy given that such resolutions are usually passed with little dissent. The AGM results are available here (pdf). For further background about remuneration at the company, see here.

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. 

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: election 2010 - the Labour Party manifesto

The Labour Party published its election manifesto today: see here (pdf). Chapter 1, page 8, sets out several proposals under the heading of corporate governance reform:

To build strong businesses we need skilled managers, accountable boards, and committed shareholders – all with a culture of long-term commitment. We will strengthen the 2006 Companies Act where necessary better to reflect these principles. The UK’s Stewardship Code for institutional shareholders should be strengthened and we will require institutional shareholders to declare how they vote and for banks to put their remuneration policies to shareholders for explicit approval.

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needs reform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – two-thirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined".

These proposals are, inevitably, vague and imprecise in places and they raise many questions, particularly concerning the manner in which the proposed takeover reforms will be achieved. Despite the statement that the takeover process requires reform, there is nothing to suggest that a future Labour Government would be prepared to challenge the shareholders' central position in the UK corporate governance framework. Can changes to the rules regarding takeovers be made without also considering the wider governance framework?

A greater role for shareholders regarding banks' remuneration policy is envisaged in the manifesto although it is not clear how the proposal for "banks to put their remuneration policies to shareholders for explicit approval" would be different from the advisory vote currently required by Section 439 of the Companies Act (2006). What does explicit approval mean in this regard?

Elsewhere there is a clear commitment - "we will require institutional shareholders to declare how they vote" - which suggests that a future Labour Government would exercise the power available to it under Section 1277 of the Companies Act (2006). With regard to institutions, the manifesto refers to strengthening the UK's Stewardship Code, although the consultation on the content of this Code has not yet been completed by the Financial Reporting Council. The FRC is considering whether the Stewardship Code should be based on the Code on the Responsibilities of Institutional Investors issued by the Institutional Shareholders’ Committee (ISC). The manifesto reference to strengthening the Stewardship Code may well mean the ISC Code, but this would be to pre-empt the results of the FRC's consultation.

UK: the Walker Review of bank governance - final recommendations published

Sir David Walker has this morning published his final recommendations following his review of the governance of banks and other financial institutions. An overview is available in the accompanying press release. Amongst Sir David's 38 recommendations are the following:

• Institutional shareholders to sign up to a Stewardship Code, sponsored by the Financial Reporting Council with compliance monitored by the Financial Services Authority (the Code on the Responsibilities of Institutional Investors prepared by the Institutional Shareholders’ Committee will become the Stewardship Code)
• Annual re-election for the chairman of the board
• The chairman of a major bank should be expected to commit a substantial proportion of his or her time, probably around two-thirds, to the business
• An expanded role for the remuneration committee with regard to firm wide remuneration policy and "high end" employees
• Disclosure, within remuneration bands, of the number of "high end" employees (including executive directors)
• Deferral of incentive payments should provide the primary risk adjustment mechanism to align rewards with sustainable performance for executive board members and “high end” employees
• If the remuneration report receives less than 75% of the votes cast the remuneration committee chair should stand for re-election in the following year
• Greater expectations placed on non-executive directors regarding time commitment and tougher scrutiny by the Financial Services Authority
• Banks should have a board level risk committee chaired by a non-executive director
• The chief risk officer should have a reporting line to the risk committee and his or her removal should require board approval

Sir David proposes that most of his recommendations should be enforced through inclusion in the Combined Code on Corporate Governance or a separate Stewardship Code for institutional investors, both of which operate on a 'comply or explain' basis. The recommendations on pay disclosure will be included in the Financial Services Bill currently before Parliament.

Related video and audio resources: Sir David discussed his recommendations on the Radio 4 Today programme this morning: listen here. The BBC News website has a short video of Sir David discussing remuneration here. A video of Sir David's appearance before the Treasury Committee, where he was questioned on his review, appears here. 

Other materials: FSA statement | FRC statement | Government statement | 

Royal Dutch Shell plc - remuneration policy update

At Shell's 2009 annual general meeting a majority of votes were cast against the remuneration report. The results were: for (1,295,183,971), against (1,896,170,360) and withheld (129,487,396). A review of remuneration policy followed and this week the chairman of Shell's remuneration committee wrote to shareholders explaining the changes being proposed to remuneration policy: see the letter here (pdf). Remuneration is being frozen and bonuses will be calculated by reference to a broader range of metrics.

Australia: shareholder voting

A report in today's Sydney Morning Herald contains some interesting data on shareholder voting in Australia and information on forthcoming AGMs where significant votes against company remuneration reports are expected. The report notes that "Last year was a watershed for protest votes on remuneration. Among the top 200 companies, a record number of eight 'no' votes of more than 50 per cent were recorded...".

UK: shareholders reject Grainger plc remuneration report

A majority of votes were cast against the remuneration report at today's annual general meeting of Grainger plc: see here (results; see resolution 2) and here (report in the Guardian newspaper with background information).

Australia: executive remuneration - Productivity Commission discussion draft published

The Productivity Commission has published its discussion draft Executive Remuneration in Australia. The Commission was asked by the Government to consider, inter alia, the effectiveness of the existing framework for the oversight, accountability and transparency of remuneration practices in Australia. The Commission is recommending changes concerning remuneration committees and the consequences of the 'say on pay' shareholder vote. 

The draft's overview contains the following key points (the draft contains much more detail and provides an excellent overview of the issues):

• Strong growth in executive remuneration and instances of large payments, despite poor company performance, have fuelled and continue to fuel community concerns that executive remuneration is out of control.
• Executive pay for larger companies appears to have grown most strongly from the mid-90s to 2000, and increased by over another 50 per cent in real terms to 2007.
• Remuneration fell in 2007-08, but it is unclear whether this decline has continued. Virtually all recent growth has come from performance pay.
• In practice, executive pay varies greatly across Australia’s 2000 public companies. For the top 20 CEOs, it averages almost $10 million (150 times AWE) compared to less than $200 000 for CEOs of the smallest companies (3 times AWE). Generally speaking, Australian executives appear to be paid in line with smaller European countries but below the UK and USA (the latter being a global outlier).
• Globalisation, increased company size, and the shift to incentive pay structures have been major drivers of executive remuneration increases — companies compete to hire the best person for the job, and try to structure pay to maximise the executive’s contribution to company performance.
• However, some trend and specific pay outcomes appear inconsistent with an efficient executive labour market. Incentive pay ‘imported’ from the United States and introduced without appropriate hurdles led to substantial pay rises in the 1990s, partly for ‘good luck’. Increasing complexity in pay arrangements in subsequent years also may have delivered ‘upside’ unanticipated by boards. Large termination payments could indicate compliant boards.
• Instances of excessive payments and perceived inappropriate behaviour can reduce public confidence in the corporate sector and impact on equity markets. But the way forward is not to by-pass the central role of boards by capping pay, which would have adverse impacts on the economy.
• The corporate governance framework should be strengthened, including by: [a] removing conflicts of interest through more independent remuneration committees, and improved processes for use of remuneration consultants; [b] promoting accountability and engagement through enhanced disclosure and strengthening the consequences for boards of shareholders’ ‘say on pay’".

With regard to this final point, the Commission recommends:

The Corporations Act 2001 should be amended to require that where a company’s remuneration report receives a ‘no’ vote of 25 per cent or higher, the board be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed and, if they have not been addressed, the reasons why. If the company’s subsequent remuneration report receives a ‘no’ vote above a prescribed threshold, all elected board members be required to submit for re-election (a ‘two strikes’ test) at either: [a] an extraordinary general meeting or [b] the next annual general meeting".

UK: PwC's executive compensation review 2009

PwC has published Executive Compensation: Review of the Year 2009: see here (pdf). The review provides an overview of trends in remuneration, based on data from company year ends falling between July 2008 and June 2009 (and prospective data where available), and reports, for example, that: 

• Around 1 in 6 FTSE100 executive directors did not receieve a bonus.
• 20% of FTSE100 companies saw more than 1 in 5 of their shareholders withhold support for their remuneration report.
• Median increases in the base salary for FTSE 100 and FTSE 250 executives fell to 1% and 0%, respectively. 
  

Germany: 'say on pay' at Siemens and ThyssenKrupp

Reuters reports that Siemens and ThyssenKrupp will be providing shareholders with an advisory 'say on pay' vote on remuneration at their forthcoming annual general meetings. Both companies' supervisory boards are chaired by Gerhard Cromme, the former chairman of the German Corporate Governance Code Commission. The companies' AGM notices - available here (pdf) and here (pdf) - contain further information.

It appears that Siemens and ThyssenKrupp have not waited for shareholders to exercise their right to request such a vote, which was introduced last year by the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG, Act on the Appropriateness of Management Board Remuneration, about which see here). 

Switzerland: 'say on pay' vote adopted by Zurich Financial Services and Swiss Re

Ethos has reported that two companies - Zurich Financial Services and Swiss Re - have agreed to provide shareholders with an advisory vote in respect of the remuneration report at their annual general meetings this year. Ethos notes that eight of the twenty companies in the Swiss Market Index (SMI) now provide such a vote.

Ireland: United Drug plc provides 'say on pay' vote

The Manifest blog reports that United Drug plc will be providing shareholders with an advisory vote in respect of the company's remuneration report at its annual general meeting next month. This is noteworthy because listed companies in Ireland are not required by companies legislation or stock exchange listing rules to provide such a voting opportunity. 

Australia: Productivity Commission report on executive remuneration released

The Productivity Commission report on executive remuneration was released today: see here (pdf - 2.6MB). The report rejects the introduction of a cap on executive pay and a binding shareholder vote on remuneration. Instead it contains 17 recommendations designed to strengthen the corporate governance framework, including: 

• All ASX300 companies should have a remuneration committee, comprising solely of non-executive directors (the majority of whom should be independent).
• The remuneration report should contain a summary statement, in plain English, of the company's remuneration policies.
• Proxy holders should be required, except in exceptional circumstances, to cast all of their directed proxies on remuneration reports and any resolutions related to those reports.
• Institutional investors, particularly superannuation funds, should disclose, at least on an annual basis, how they have voted on remuneration reports and other remuneration-related issues.
• Where a company’s remuneration report receives a ‘no’ vote of 25 per cent or more of eligible votes cast at an AGM, the board should be required to explain in its subsequent report how shareholder concerns were addressed and, if they have not been, the reasons why; where the subsequent remuneration report receives a 'no' vote of 25 per cent or more of eligible votes cast at the next AGM, a resolution should be put that the elected directors who signed the directors’ report for that meeting stand for re-election at an extraordinary general meeting.

For further information see: media release| overview (including key points) | recommendations and findings | Productivity Commission remuneration enquiry site | submissions | public hearing transcripts | Government response to the report |