I am thinking these reforms are as watered down as I was on my way to work this morning. The government has published its report on directors' pay reform proposals.
These plans are to strengthen the hand of shareholders and increase transparency. Well I think transparency is the wrong word because that implies more disclosure. Well in fact most of what is being proposed is already disclosed in most if not all annual reports. What these proposals are, is at best simplification.
I do not think I have to discuss the proposal to give shareholders a binding vote to a great extent. This is simply a bad idea. The government has pandered to its audience that believe shareholders own the company and somehow employee the directors. Quite simply they don't. The company as a separate legal personality appoints directors to undertake responsibility for its assets. It is for the company to reward its directors, not the shareholders. But for this to remain viable and for there to be a reduction in agency costs there needs to be a body of independent directors who reward the executive directors who actively run the company. This is where the real problem has stemmed from. These independent directors only became prominent on boards when they became useful to the executives, i.e. through helping in strategy and advice. Supposed independent non-executives have become increasingly involved with the running and strategy of the company which reduces their independence.
Thus I remain unconvinced that shareholders deserve a stronger hand. They buy shares in a company, they do not own it. If they do not like what the bought then they can sell it.
If remuneration is going to be managed properly you need to ensure that the non-executives who are deciding on remuneration are truly independent. This does not mean all non-executives need to take a step back, just those deciding remuneration. The Corporate Governance Code or the Financial Reporting Council is suggesting to revise the Code with measures on restrictions in regard to executives sitting on remuneration committees at other companies. This is probably a positive step, but one from the FRC rather than the government proposals. See here for relevant links.
For some of the proposals...
It would be interesting to see how the government tries to disclose details of the directors' employment contracts. Their rights as an employee are separate for rights as a director. I am not quite sure if this is something that should be published in annual reports. More information needed though before further comment.
The proposals want details of what directors will get paid for performance that is above, below or on target. Well anyone who owns a calculator could figure that out from the annual report already. They are required to disclose the shares awarded in a particular year and share price they were awarded at. They also publish the criteria that performance is measured against at the percentage that will vest depending on what targets they meet. Some firms do in fact already publish an estimated value at maximum vesting of the awards.
Thus this point does highlight that it is simplification and not increased transparency.
They also want information on the change of profit, dividends and the overall spend on pay. Well yet again this information is available through the annual reports. It is just more simplification.
They also want material facts taken in to consideration when setting pay to be published. Well let us face it, that is not worth the paper it is written on. Not to mention in most cases companies do already publish this. BP for example after the oil spill detailed their consideration of that matter in awarding remuneration. It did not stop their chief executive resigning that year on a package worth well over £5million if I remember correctly. What is the Government expecting from this proposal. A declaration that they considered these wider interests and then ignored them anyway. Increased evidence of watered-down simplification.
Table B of the proposals in the report do not seem to have any differences from what is already required of companies in annual reports. The requirement of a total single figure of remuneration does require companies to publish a single figure that includes variable pay and pensions. Again, the trusty calculator could have already done this without the need for reform. Apparently this figure will be calculated using a methodology complied by the FRC to include actual pay earned rather than potential pay awarded. However, the report does not clarify how this will then encompass pensions since this is never pay earned and is merely a debt on the company's balance sheet.
These are early days though. The next steps are for the government to bring forward reforms to the Enterprise and Regulatory Reform Bill as well as publishing revised Regulations setting out what companies must publish on directors' pay.
These plans are to strengthen the hand of shareholders and increase transparency. Well I think transparency is the wrong word because that implies more disclosure. Well in fact most of what is being proposed is already disclosed in most if not all annual reports. What these proposals are, is at best simplification.
I do not think I have to discuss the proposal to give shareholders a binding vote to a great extent. This is simply a bad idea. The government has pandered to its audience that believe shareholders own the company and somehow employee the directors. Quite simply they don't. The company as a separate legal personality appoints directors to undertake responsibility for its assets. It is for the company to reward its directors, not the shareholders. But for this to remain viable and for there to be a reduction in agency costs there needs to be a body of independent directors who reward the executive directors who actively run the company. This is where the real problem has stemmed from. These independent directors only became prominent on boards when they became useful to the executives, i.e. through helping in strategy and advice. Supposed independent non-executives have become increasingly involved with the running and strategy of the company which reduces their independence.
Thus I remain unconvinced that shareholders deserve a stronger hand. They buy shares in a company, they do not own it. If they do not like what the bought then they can sell it.
If remuneration is going to be managed properly you need to ensure that the non-executives who are deciding on remuneration are truly independent. This does not mean all non-executives need to take a step back, just those deciding remuneration. The Corporate Governance Code or the Financial Reporting Council is suggesting to revise the Code with measures on restrictions in regard to executives sitting on remuneration committees at other companies. This is probably a positive step, but one from the FRC rather than the government proposals. See here for relevant links.
For some of the proposals...
It would be interesting to see how the government tries to disclose details of the directors' employment contracts. Their rights as an employee are separate for rights as a director. I am not quite sure if this is something that should be published in annual reports. More information needed though before further comment.
The proposals want details of what directors will get paid for performance that is above, below or on target. Well anyone who owns a calculator could figure that out from the annual report already. They are required to disclose the shares awarded in a particular year and share price they were awarded at. They also publish the criteria that performance is measured against at the percentage that will vest depending on what targets they meet. Some firms do in fact already publish an estimated value at maximum vesting of the awards.
Thus this point does highlight that it is simplification and not increased transparency.
They also want information on the change of profit, dividends and the overall spend on pay. Well yet again this information is available through the annual reports. It is just more simplification.
They also want material facts taken in to consideration when setting pay to be published. Well let us face it, that is not worth the paper it is written on. Not to mention in most cases companies do already publish this. BP for example after the oil spill detailed their consideration of that matter in awarding remuneration. It did not stop their chief executive resigning that year on a package worth well over £5million if I remember correctly. What is the Government expecting from this proposal. A declaration that they considered these wider interests and then ignored them anyway. Increased evidence of watered-down simplification.
Table B of the proposals in the report do not seem to have any differences from what is already required of companies in annual reports. The requirement of a total single figure of remuneration does require companies to publish a single figure that includes variable pay and pensions. Again, the trusty calculator could have already done this without the need for reform. Apparently this figure will be calculated using a methodology complied by the FRC to include actual pay earned rather than potential pay awarded. However, the report does not clarify how this will then encompass pensions since this is never pay earned and is merely a debt on the company's balance sheet.
These are early days though. The next steps are for the government to bring forward reforms to the Enterprise and Regulatory Reform Bill as well as publishing revised Regulations setting out what companies must publish on directors' pay.
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