To all those reading this I am David Gibbs; I am a Lecturer in Law at the University of East Anglia.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.
ORCID 0000-0002-6596-8536

Monday, 25 July 2011

Publication from Leeds Conference

Back in late 2010 I attended a conference at Leeds University on directors' duties and shareholder litigation in wake of the financial crisis (see here for blog post).

At the event I asked a couple of questions on derivative claims and whether the new claim under the Companies Act 2006 had potentially achieved its aim of benefiting small private companies and one on regulatory competition in regards to Prof. Armour's paper on Delaware losing its cases.

These questions and the relevant answers from the panel will now form part of a chapter in an edited collection by Edward Elgar. I will keep posted on the developments but do not predict any release until late in the year or early next year; but a bit of good news none the less.

Multiple Directorships on FTSE 100 Banking Boards

You may recall a few weeks ago a post on the draft EU Directive proposing caps on multiple directorships on banking boards (see here) for which I provided some anecdotal evidence from the Royal Bank of Scotland.

Fortunately (or some may say unfortunately if you have ever had the desire to look at a bank's annual reports) my random sample contained all five banks featured in the FTSE 100: Barclays; HSBC; Llyods; RBS; and Standard Chartered. 

The graphs below represent total and mean of multiple directorships held by executives and non-executives in a five year data period of 2006-2010. The first graph are multiple directorships at the time the annual report was published whereas the second and third evidence those held by directors who served throughout the financial year including the mean.

MDs @ Annual Report

MDs - Year

Although the data is only descriptive at the moment, one can still make some assumptions. Resource Dependence Theory claims that we should see a rise in multiple directorships where there are difficult market conditions as multiple directorships are characteristics of good managers in a managerial labour market. 2008 onwards we can take as what one could describe as "difficult market conditions".

For non-executives we however see a sharp decrease in 2008. This may be down to higher levels of board changes in that year due to the recession which may have been caused by the company itself terminating contracts or non-executives perceiving increased liability and resigning from positions themselves.

However, since 2008 the mean number of non-executive multiple directorships have been steadily rising again. This may be consistent with the Resource Dependence Theory that directors increase their directorships to help in the difficult market conditions they face.

Executives on the other hand have seen pretty much the opposite to non-executives. A growth in multiple directorships towards the recession followed by a steady decline post-recession. If one trusts managerial labour markets this may have been caused by the perception of banking boards performing well up until the recession resulting in more offers for other positions. Once the recession hit then multiple directorships decreased for executives due to their "poor performance" in managerial labour markets. Again, board changes may have also been important for banks in 2008 which may have played a part in the decrease.

Other information
For bank boards in 2006-2010 the average board membership for the year were the following (exec:non-exec)
2006: 5.8:12.4
2007: 5:11.6
2008: 5.8:13.4
2009: 4.8:13.6
2010: 4.6:11.8

On top of this information data has also been collected in regards to meeting attendance; independence; equity ownership; share capital; and remuneration. It will be interesting to see how these factors correlate with multiple directorships. Remuneration may be particularly interesting as anecdotal evidence seems to show an increase in remuneration for non-executives due to their "increased responsibility" as cited as a reason by numerous annual reports yet multiple directorships for non-executives has been increasing since 2008 and fairly unchanged between 2006 and 2010.

Although other studies have documented attendance of directors at meetings as a variable it is curious whether it is a reliable variable on how directors spend their time or whether mutliple directorships can affect attendance at meetings. It is of no surprise that my data shows high attendance at meetings from directors no matter how many boards they are on. If a director is on three or four boards it may not be too burdensome to attend 48 or so meetings a year. Obtaining clearer data on whether a director's ability to perform his/her duties may require a qualitative assessment on an individual level.   

Monday, 18 July 2011

Knowing your OMGs from your DSAs

This blog post and potential article is very much a work in progress in getting to grips with the relevant legislation, codes and regulations relating to remuneration reports for directors - so advance apologies for any inaccuracies.

Having worked my way through a good 150 annual reports of FTSE 100 companies over the past 2 months I have begun to get to grips with the requirements on listed companies and UK registered companies for their remuneration reports.

There are four "documents" one has to be acquainted with first to understand remuneration reports of FTSE companies which can be described as a four layered approach. These four layers are:

1) Companies Act 2006 (CA 06)
2) The Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008/410 (Regulations)
3) Financial Service Authority's Listing Rules (FSA LR)
4) The UK Corporate Governance Code

1) CA 2006
A fairly easy layer to get to grips with as the relevant sections are basically headings that are "fleshed out" by the other layers.

s 420 - Places a duty on the directors to prepare a remuneration report
s 421 - This section gives the power to the secretary of state to make provisions by regulations as to the contents of the directors' remuneration report

s 172 - I do not really feel I need to say much about s172 and the duty to promote the interests of the company for two reasons: 1) This work is aimed at being more technical and objective piece than subjective and opinionated; 2) Although there are undoubtedly some excellent articles out there on the section; it has been given significant attention to the point where discussion is perhaps becoming derivative with too much emphasis on the section's importance. s 172 of course deserves a mention as it provides the boundaries of which remuneration can be awarded in but I feel it needs no more than a brief mention here.

2) Regulations
These Regulations apply to large and medium sized companies (See CA 06 s 465-7) registered in the UK.
Here we have the Regulations that are created by the Sec of State under the power given to him under s420 etc.

These Regulations have in fact been given very little academic attention. In a quick Westlaw search I found one significant article on remuneration but only gives one brief reference to these Regulations - see D Arsalidou 'The Regulation of Executive Pay and Economic Theory' (2011) 5 JBL 431. A very insightful article although a little disappointing more attention was not given to the Regulations - perhaps this being down to their technical nature.

The relevant schedules in the Regulations are 5 and 8 which deal with the contents of the remuneration report.

Schedule 5 - Information about benefits of directors
Paragraph 1 - There must be a disclosure of directors' total remuneration

Para 9 - Remuneration means: Salary, fees bonuses, sums paid by way of expenses allowances and the value of any other benefits received by a director otherwise than in cash

Schedule 8 - Quoted companies remuneration report
Para 7 - this requires disclosure of the total amount of the following information for each director who has served for the relevant financial year: Salary and fees; bonuses paid or receivable; expenses; compensation for loss of office; estimated value of non-cash benefits that do not fall within one of the above or paras 8-12, and are emoluments of that person and received in respect of qualifying services

So Paras 8-12 require individual disclosure. These sections relate to share options and long term incentive schemes which you may see referred to as LTIS, LTIP (P for plan instead of scheme) or PSP (performance share plans)

As a side note para 13 deals with pensions but will not be addressed as pensions do not constitute money paid to directors nor does it represent a payment by the company. Pension contributions are a liability of the company and thus not meaningful to include in the remuneration total.

Para 8-9 - These sections deal with share options which may include save-as-you-earn (SAYE) options. Information required to be disclosed under these sections includes:
Share options at the beginning and end of the relevant financial year; those options granted, exercised, unexercised and those where conditions have changed throughout the year; Where the option is unexpired it must be stated the price paid for the award, the exercise price, exercise price from the date which the option may be exercised and the date the option expires

Paras 11-12 - The definition of a LTIS can be found in Schedule 5 Para 11 and states that they are schemes which include one or more qualifying conditions with respect to service or performance that cannot be fulfilled within a single financial year

These sections deal with the LTIS and are generally awards receivable dependent on performance conditions over a three year vesting/performance period. Each performance condition is usually assessed individually and so the total amount eventually awarded may result in 100% vesting under one condition and 0% under another.

Conditions that are generally attached to these types of awards are individual performance and so one would suspect to find that where independence or attendance of non-executive directors is low then this performance condition would either have less percentage importance on the potential total amount of the PSP award (if shareholders have some tremendous foresight and interest in the company) or directors percentage of award vesting will be higher.

Other conditions that are popular amongst FTSE companies are EPS (earnings per share) and TSR (total shareholder return). TSR is usually assessed through comparator groups of companies in the same sector/stock exchange and these conditions can be assessed objectively unlike individual performance condition above. For example if TSR is higher than all of the other comparators then X amount of the shares are like to vest in full under this condition. The further the company falls down in the percentiles of the comparator group the less performance conditions will be met and thus less of an award is achieved.

The sections themselves are similar to that of 8 and 9 for share options and I will not repeat them.

Under the Regulations justification of awards is required for both LTIS and share option if there are no performance conditions attaching to those awards. (Sch 8 para 3(2)(f)). This undoubtedly attempts to deter large share awards without attaching performance conditions on them. Such schemes generally require shareholder approval by any means.

Companies often see options and LTIS as strong retention incentives for directors since they are subject to forfeiture if a director leaves them company. One doubts this is the case though as it was often noted that payments were made to directors who had been recruited to cover awards forfeited for leaving the company and so this belief must be doubted.

3) Listing Rules
As well as complying with the Regulations, listed companies must comply with the FSA LR. Perhaps the most important difference between the Regulations and the LR is deferred bonuses (sometimes referred to DSAs - deferred share awards). Under the Regulations disclosure under Sch 8 Para 7 is required for bonuses paid or receivable and an LTIS is described as above that is an agreement or arrangement where performance conditions cannot be fulfilled in a single financial year.

The difference is that the Regulations give a wider definition of an LTIS than the LR. LR state that an LTIS - under Appendix 1 - any arrangement (other than... a deferred bonus)...

The definition then continues similar to that of the Regulations.

Furthermore LR 9.8.8 also requires disclosure of bonuses and DSA for each individual director's remuneration whereas the Regulations just requires disclosure in the total remuneration of bonuses.

A DSA is generally part or even all of a directors annual bonus that is then deferred in to shares for 2-3 years that are subject to forfeiture if a director leaves or in some cases where performance conditions were originally met they have in some way no longer been satisfied i.e. a director improved TSR for short-term gain which in fact destroyed TSR in the long-term.

Thus, under the Regulations disclosure of DSA is required in the same for as LTIS whereas under the LR they merely have to be disclosed in a director's total remuneration.

And finally on the technical side...

In stark contrast to LTIS and DSA, annual bonuses have very little disclosure requirements other than the total amount. This is presumed to be because the amount paid is "visible" as it has already been paid and so can be judged as to whether it is reasonable; whereas LTIS are subject to performance, service etc and can only be judged through disclosure of other relevant information.

4) UK Corporate Governance Code
A brief mention to the Code: generally it sets out some best practice policies including composition of the remuneration committee under schedule A and D.2.1. I shall not elaborate on this for now as it is another topic that has already received a lot of attention elsewhere.

As I said at the beginning very much a work in progress but is certainly an interesting area of attention. I have alluded slightly to economic theory under LTIS and the importance of using objective and subjective criteria in assessing performance conditions for these awards and will be an area to take forward. Transparency itself is an important area of development in the EU and it seems there is room for improvement under the relevant material relating to remuneration reports. Comments welcome on this topic and any corrections on any erroneous information (hopefully none on the latter)

Friday, 1 July 2011

Bank Governance and Multiple Directorships

OK, so I am beginning to see the light at the end of the data mining tunnel. Another two weeks and hopefully it will be done.

Amid the data mining a recent blog post from Robert Goddard on Corporate Law and Governance noted that a report from The Financial Times, which also discussed female quotas on boards, highlighted that a draft EU directive suggested caps on directors of banks serving on other boards - no more than two non-executive positions for executives and no more than four executive positions for anyone.

My data compromising of 30 firms from the FTSE 100 suggests that this would have little to no impact on English directors, especially those on banking boards. Anecdotal evidence suggested that where directors hold more than three positions most of those positions are held on boards abroad rather than in the UK.

As for multiple directorships or interlocks on banking boards it seems such a proposal will have little impact on UK banks. For example, The Royal Bank of Scotland's (RBS) executive directors in 2006 held between them three multiple directorships with a total of seven executives serving throughout that year (0.42 directorships per director). For 2010 there were no multiple directorships held by any executives throughout the year.

Non-executives portray a potentially different story; but again using RBS as an example throughout 2006 eleven non-executives served on the board with a total of twenty-seven other directorships held between them (2.45 per director). In 2010 however, ten non-executives served throughout the year with a total of sixteen other directorships (1.6 per director).

Although interlocks are unsurprisingly higher for non-executives and not uncommon amongst executives (although RBS is perhaps not the best example of this) neither seem to trouble potential thresholds suggested by the EU.

However, just because UK boards rarely break the suggested thresholds one would still not support a cap on interlocks. Boards need to be dynamic to respond to changing conditions and trying to straight-jacket boards is not a feature of a modern economy.