Fiduciary Duties of Non-Executive Directors and Capacity

It has been a while since I focused on this topic. Today I returned to it reading an article on the topic by Witney, 'Corporate Opportunities Law on the Non-Executive Director (2016) 16(1) JCLS 145.

The work cites my piece in the Company Lawyer that seeks to explain that a fiduciary duty of a director is often misunderstood because people struggle to grasp that an executive director generally takes responsibility for all interests of the company, which are broadly defined because a company cannot act by itself. It is completely reliant on its directors. But people look to narrow the interests of the company and focus on defining its interests rather than what the director takes responsibility for, which is the orthodox for fiduciaries. Thus, they seek to change the fiduciary jurisdiction and apply it differently to all directors than they would to other types of fiduciaries because they look to focus on the interests of the principal rather than what interests the director is responsible for.

Whilst it is possible to vary when it is owed, as the article explains by focusing on the scope, it is not possible to change the application of the duty once it is owed. Duties, including fiduciary ones, are monolithic. They cannot be varied once owed. They are inflexible, not flexible as Witney claims. Only when they apply is flexible because, as my article shows, it depends on what the fiduciary has responsibility for to the principal's interests.

The argued changes to application of fiduciary duties for directors, as a result of that confusion, comes in many different forms, that this article tries to advance with little plausible justification for it. For one, there is no such thing as corporate opportunities law. There is no such doctrine in the UK. He tries to use this to explain that the capacity you are acting in can affect whether you can avoid the application of fiduciary duties. That is also not possible. It shows a complete disregard for the meaning of loyalty. The purpose of the duty of loyalty is to regulate self-interest within the scope of the undertaking to the principal's interests. It bans self-interest to fulfil this purpose and demands loyalty to the principal's interests that you are responsible for. This is because the director stands in the stronger position, capable of manipulating information to prefer their own interests ahead of the ones they undertook to act for. It is therefore complete fiction that the capacity you are acting in affects the fiduciary duty. The idea that we can simply argue we were acting in a personal capacity to avoid acting for the interests you undertook to protect is a complete disregard for the duty. His example given, that it is none of the company's business to be offered investment opportunities that the director invests in personally, is just one way the duty could be abused and undermine that purpose. Witney offers no justification as to why it would not be a breach other than 'capacity' (I note he cites a couple of cases where there has been no breach of duty such as CMS Dolphin, Plus Group v Pyke, and West Coast Capital but all have been misapplied as to why there was no breach in those instances, I return to one example below). On that ground I could argue any conflicting investment was not conflicting simply because I was acting in a personal capacity. The duty of loyalty is strict in its application. Is there a risk of conflict i.e. did your personal interest conflict with the interests of the company you undertook to protect? If yes, there is a breach. Capacity is not an excuse and never has been. The flexibility Witney refers to is misapplied to fit his thesis. The flexibility is when the duty is owed, not how it is applied.

To return to the cases he cites, mentioned above: He says these cases show that it is clear that a director is not bound by their duties all the time. Is it? But consider Plus Group v Pyke and CMS Dolphin that are glossed over to advance his thesis. Of course a director can resign even though it would be harmful to the business. But there is clearly no conflict of interest in resigning. What interest is he acting in conflict with by resigning? None. But take the example further. The director resigns to take an opportunity personally. If the director has responsibility for the interest that is a conflict of interests. He is still well within his right to resign but his motivation makes it a breach because he is doing it due to a conflict of interests. It has nothing to do with his capacity.

Thus Witney misunderstands what I said when I advance that a court needs to consider what the director has responsibility for. He says this is only one relevant factor in determining whether the duty was owed as a director cannot unilaterally determine the scope of their duty. No, it is the only factor in determining the scope initially, because there are no constructive fiduciaries and yes, they cannot unilaterally determine the scope of duty as much as the principal cannot unilaterally determine it. The scope is set based on what the parties mutually agreed the fiduciary's responsibility would be. If the director did not take responsibility for the matter then they cannot be required to owe a duty of loyalty. If the director does take responsibility, whether it be unilaterally, voluntarily, or contractually then the duty is owed.

I agree with the premise of Witney's article though, that the broad application of fiduciary duties can make it difficult for non-executives to practically take on multiple roles, which they often do. However, that is not the company's problem. The House of Lords have long shown little sympathy for an individual who puts themselves in a position of conflicting duties. A non-executive does not have to take on multiple roles to fulfil their function to one principal. The Court of Appeal made it clear that the court will only permit self-interest where acting for multiple principals is inherent to the business. If non-execs want to take on conflicting opportunities then get authorisation from the principal. The conservative line is not a problem. Flagrant disregard for the duty is, however.

Now to apply this to non-executives, as my paper briefly did, they do not necessarily take responsibility for all the interests of the company. Executive directors generally do as a presumption because the company simply cannot act without them. Therefore, there is some flexibility in when the duty is owed for non-executives to accommodate their multiple appointments, but that is not the same as advocating a change in the way the duty is applied. The added benefit of this approach compared to the capacity approach is certainty. We can say with certainty what the director's (non-exec or exec's) responsibility was. Saying what capacity they were acting in is riddled with uncertainty.

So finally, to return to Plus Group v Pyke, the director in that case avoided liability because the facts demonstrated he no longer had responsibility for the interests of the company as they had been effectively forced out of the company in all but name. It had nothing to do with capacity. Capacity has never been inherent in common law or equity.

Volkswagen: Corporate law and governance failings?

Now, you might have been living under a rock if you have not noticed the on-going scandal, or perhaps disaster, at Volkswagen. Normally, a corporate scandal would not get me in enough of a bind to write a post about it, because it has become something of a regularity in one sector or another. So why have I merited this one for attention.

Well, it was after the comments from one of its directors, Olaf Lies, that I decided to write a short piece here. See here for a report and here for analysis. Yes, Mr Lies is one of VW's directors on the supervisory board. This is not the kind of stuff you can make up (albeit this BBC News reporter here humorously goes to great lengths to pronounce his surname how it should be, at around 1:20). It was his comments that particularly got me motivated.

My interest started when Martin Winterkorn, former CEO of Volkswagen, resigned in wake of the crisis stating that he was "not aware of any wrongdoing on my part" and was stepping down in the best interests of the company. He also noted he was "shocked" and the firm needed a "fresh start". Now I am pretty sure most articles on the subject of his resignation could have dispensed with such lengthy pieces to simply state: "shock horror! CEO denies knowing what is going on in the company...again". I for one have had enough of these CEO's claiming they knew nothing and desperately trying to cling to power! Remember Bob Diamond of Barclays anyone?

Many have commented on Winterkorn's attention to detail, so I would certainly agree that if he didn't know, he should have. He has also previously been VW's head of Group Quality Assurance and been in the car industry for over 20 years. But let's even say he genuinely did not know, what is he paid this much money for to do? (in case you were wondering, in 2014 Winterkorn received around 15m EUR in remuneration, see here and below). Selling cars is what VW do, and he did not know. When he found out, he described himself as shocked. At least stand up and acknowledge your own failings of not providing appropriate oversight within your company. It is the company you control and the buck stops there. The whole point of having separate legal personality for companies was to stop shareholders, who did not run the company, being personally responsible for the decisions of others. Yet here we have a controller denying responsibility for his own job and ultimately it is the shareholders feeling the pinch due to tumbling share prices.

Yet I get distracted. From Winterkorn then we get a statement from Mr Lies, claiming those responsible should be criminally liable. It might as well be an admission of guilt, or at least unlawfulness, because you as a board member are responsible for the company you control and the people you delegate to. It is you Mr Lies and other board members who must take responsibility for failing in providing that oversight. You are a supervisory board member, but where was the supervision for the 400,000 EUR that you receive? (NB: the majority of his fee does go to the state of Lower Saxony) Whilst others might have been complicit in the scandal it is another thing to try and shift all the blame on to the employees who were most likely working under onerous targets set by, yes, the board and senior managers.

Mr Lies openly admits to only having just found out about the problems in the "last board meeting". But Mr Lies is a well connected man as the economy minister of Lower Saxony where VW is based. Is it plausible for a man of his position not to have known. Perhaps he did not know because his workload is too demanding. Mr Lies hold 5 other directorships as well as being the economy minister and a board member at VW, see here. The German Corporate Governance Code permits a supervisory board member to have a maximum of 10 additional appointments but this must raise serious questions about that provision. Or perhaps the board was simply too large for anyone to do anything? The supervisory board has 20 members. If the company is forced to trim the fat surely it should start from the top? Perhaps I am optimistic in ignoring the fact the savings that will have to be made will be more likely borne by employees, shareholders, creditors and customers?

Sure Winterkorn has lost his position and Lies might lose his, but this is minor in comparison in respect of what will happen to these other groups of individuals. Lies still holds several other positions to supplement his income. Winterkorn is listed as a board member at Bayern Munich in VW's 2014 annual report. Not to mention his hefty remuneration again, is probably enough to keep him going, which I have copied here.

		MARTIN WINTERKORN
		Chairman of the Board of Management, Research and Development
€		2014		2013
Fixed remuneration		1,617,025		1,486,525
Fringe benefits		300,453		421,337
Total		1,917,478		1,907,862
One-year variable remuneration		3,148,000		3,001,000
Multiyear variable remuneration		10,796,000		10,097,000
Business performance bonus (two-year period)		6,296,000		6,002,000
LTI (four-year period)		4,500,000		4,095,000
Total		15,861,478		15,005,862
Pension expense		0		0
Total remuneration		15,861,478		15,005,862

So in summation, corporate law and governance is exposed. Law in its failings to punish the right people, and governance for not incentivising people sufficiently.  

New Publication

My recent article has now been published in the Company Lawyer. The full reference is:

D Gibbs, 'The absolute limit of directors' fiduciary liability for conflicts of interest: the director's perspective' (2015) 36(8) Company Lawyer 231-244

More to follow...

LCCGE Presentation

Last Friday I presented my research at the London Centre for Corporate Governance and Ethics. It was a good experience and a good chance to publicise the work. The presentation is now available online and can be found here. 

SSAHRI Research Conference

As part of my research grant I have been asked to produce a poster about my research. I will be presenting it next Wednesday at Hertfordshire College Lane for anyone in the vicinity. I focused on the variable of remuneration from the study given the limited room to try and explain every variable and point from the study in a single poster.

WINIR Symposium Abstract Accepted

I have recently had my abstract accepted to present my research paper at next year's World Interdisciplinary Network for Institutional Research (WINIR) Symposium taking place 22nd-24th April 2015 in Lugano Switzerland. My abstract is posted below. I will be presenting some of my research findings from my empirical study in to self-interest amongst non-executive directors. Its aim is to serve as a rebuttal of sorts to cool claims that greater involvement from non-executive directors will lead to better governance.

Abstract:

The governance of a company in England consists of a single board of directors comprising executives and non-executives. Executives run the company on a day-to-day basis, whilst non-executives oversee and participate in monitoring and strategy. Legal rules and corporate governance structures often focus on how the interests of the executives can be aligned with the interests of the company. Research also considers how effective these are. However, seldom is the focus on potential self-interest amongst non-executive directors. Their role has increased, as has their remuneration, creating greater opportunity for non-executives to use their position for self-interested means. Multiple appointments are common amongst non-executives and are a central feature of the corporate governance landscape. Yet they may also be a form of perquisite consumption, taken for the personal benefit of the non-executive or used advantageously to benefit one firm over another. Using multiple appointments as a proxy for self-interest this quantitative study investigates the governance mechanisms that may be used to control self-interest and the effect that these appointments may have on the governance of the firm. Using data collected from FTSE 100 companies at firm level over a five-year period 2006-2010, the study focuses on aspects such as remuneration, equity and agency problems as possible influences on the taking of multiple appointments. The study reveals that increased fees result in a greater amount of external appointments, as does a concentration of agency problems. The study also reveals that whilst equity may reduce external appointments it may be an insufficient control on self-interest. The impact of the study shows that propositions for greater non-executive involvement to enhance governance in the firm needs to be balanced against the current lack of controls on self-interest. Without such considerations greater involvement may not have the intended consequences.  

Fiduciaries and competing principals

At the end of July the Court of Appeal discussed in its judgment in Rossetti v Diamond Sofa Company Ltd [2012] EWCA Civ 1021 the capacity to which an agent could act for a competitor of their principal. The question was whether the fiduciary had breached their duty of loyalty to their principal by acting for a competitor.

The fiduciary in this case was an agent. The type of fiduciary and the role they undertake are always important facts to establish. The reason being as established by Sedley LJ: 'The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached'. Plus Group Ltd v Pyke [2002] EWCA Civ 370

It is generally accepted that one is a fiduciary because they owe a duty of loyalty rather than the other way round. Thus circumstances must demonstrate that loyalty was reasonably expected. When it is to be reasonably expected is open to competing theories but the most compelling argument is when one has been granted limited access to the affairs and property of another. Thus for example trustees, company directors and agents are obvious examples of individuals likely to owe the fiduciary duty. Directors are granted control of the company's property and affairs to advance the company's interests and not their own personal interests. However, with control of another's affairs and assets comes with it the problem of self-regard and opportunism to prefer one's own interests over their principal's. Thus the fiduciary duty of loyalty is owed to protect the principal for the director/trustee/agent acting opportunistically.

In Rossetti there was no question as to whether the duty was owed as they were clearly acting in a fiduciary capacity as an agent. However, the question was whether the duty had been breached; or was the duty of loyalty owed in the particular circumstance. For fiduciaries the duty of loyalty cannot be open ended as it would 'prevent a [fiduciary] from utilizing his spare time ... and impose upon a man, in relation to the rest of the week an obligation which would unreasonably tie his hands'. Hivac Limited v Park Royal Scientific Instruments Ltd [1946] Ch 169 . Therefore the duty of loyalty is only owed on matters for which they are retained. As Lord Upjohn described: 'It is perfectly clear that a solicitor can if he so desires act against his clients in any matter in which he has not been retained by them'. Boardman v Phipps [1967] 2 AC 46

Therefore scope can be a particularly tricky issue in identifying when loyalty is owed. For fiduciary relationships such as trustees, solicitors, estate agents the issue may be easier. These roles usually involve specific identifiable property that they have undertake to advance/protect/sell. Thus in the infamous case of Keech v Sandford (1726) 25 ER 223, the trustee was to protect the lease for an infant beneficiary. When he took the lease personally he was in breach of his duty of loyalty as his personal interests conflicted with his duty. Yet, his duty would not have prevented him from taking on personally a separate lease, even if the infant beneficiary was interested in it, since the trustee was only retained to hold on trust that specific lease.

Now to the facts of Rossetti. Diamond were a company based in Thialand who appointed SML as agents to advance their UK business. The agreement eventually came to an end and Diamond appointed another company, RML, to act for them. RML had in fact been set up by the people behind SML to take on the clients of SML. However, the relationship had begun to deteriorate. Diamond eventually terminated the agreement because it was discovered that RML had been representing two direct competitors.

Lord Neuberger delivered the judgment which Rimer and Moses LLJ agreed with. As a general rule he found that it would be a breach of fiduciary duty to act for competing principals but identified two situations where a fiduciary may act for a competing principal: (1) the principals agree to them so acting; and (2) where the principal appreciated it was the fiduciaries business to act for multiple principals.

The former is certainly true, the latter seems inaccurate based on the House of Lords decision in Boardman v Phipps. Here the beneficiaries to a trust were fully aware, and even encouraged the purchase of shares in a company by the trustees in which the beneficiaries already held shares. Yet the House of Lords decided in a 3v2 majority that there was a breach. The fact that a principal may appreciate them acting for multiple principals does not mean they should tolerate them acting for a competing principal. If the conflict has not been approved by the principal(s) the only question that needs to be addressed is whether there is real sensible possibility of a conflict. If Lord Neuberger is correct then it is conceivable that a non-executive director could act for numerous principals, even competing ones, and not incur liability. This would seem unlikely based on the Court of Appeal's decision in Pyke. Sedley LJ, again, said, what if a director used his boardroom vote/influence to assist a competitor when the 'competitor was the director himself or another company of which he was also a director'. Strict fiduciary liability cannot be watered down on the fact that the principal knew it was the fiduciaries business to act for multiple principals. Such leniency would easily allow the fiduciary to be negligent or opportunistic if they deem it preferable to prefer one principal over another. Acting for multiple principals though is not the offending act. As Lord Upjohn stated, acting against your principal on matters for which you have not been retained is not objectionable. It is objectionable, however, to compete against your principal.

Yet, Lord Neuberger did not find either of these exceptions in this case.  He found that Diamond had been told by SML there would be no clash of products with other competitors before it was discovered they were acting for two other competing businesses. This supported the conclusion that Diamond would not have expected SML, and subsequently RML, to act for competitors.

The Court of Appeal's decision fails to address a couple of points. One is what is mentioned above and determining the scope of fiduciary liability for different in different relationships. Second is discussing what is meant by competing. These two questions have serious consequences for directors ever since an earlier decision from Rimer J in Re Allied Business & Financial Consultants [2009] EWCA Civ 751 where he described directors as general fiduciaries with unlimited capacity meaning their loyalty was not circumscribed by the contract since a company's constitution is open to any business ever since the removal of the ultra vires rule, if not before. For non-executive directors it would seem excessively harsh to describe them as general fiduciaries when it is, as Lord Neuberger suggests, general place for such a fiduciary to act for multiple principals. Even executive directors commonly act for one other principal. Therefore determining the scope of fiduciary liability and what is meant by competing in such cases must be addressed in questions concerning competing principals. Answers to these questions are discussed in more detail in my thesis.

Significant agency problems and multiple directorships

Part of my analysis on multiple directorships considers corporate governance theories such as agency theory and applies this against the issue of multiple directorships.

Agency theory in a nutshell is where somebody parts with control over their assets to the control of another due to, inter alia, an inability or unwillingness to deal with them personally. Inherent in such a relationship is the ability of the person in control to use those assets and the access to them to serve their own self-interest. In a corporate context the owner then must incur agency costs to align the interest of those in control with his own.

This is a premise for "good corporate governance" and what are the best ways, effectively, to minimise agency costs. Agency theory has developed a number of solutions to curtailing self-interest through a number of governance factors (alongside any existing legal deterrents to self-interest such as fiduciary duties). The theory identifies factors such as splitting the role of CEO and chair to two different individuals so no one individual controls the board, holding regular board meetings (as well as directors not missing too many), regular committee meetings such as the remuneration committee, executives not holding too many external appointments, a high level of independent directors to executives, high equity ownership from executives, high percentage of pay for performance element in compensation package, and a good sized board all as features of good governance.

These are just a few of potentially numerous agency problems in a firm but gives a good account of what is considered good governance according to the UK Corporate Governance Code.

The amount of agency problems present in any given firm may vary. Executives may be more able than others to impose higher agency costs. Agency theory would predict this is due to insufficient monitoring from the independent non-executives. A reason why non-executives are not monitoring effectively may be from their own external appointments that they have viewed them as a perquisite consumption due to the increasing value of remuneration available in such positions. Therefore one may predict that where a firm has more agency problems then the firm will also have a higher level of non-executives with more external appointments.

To test for this, indicator variables were created to show whether a firm had an agency problem from those just mentioned above (9 in total) and were collated. This figure was put in to a multiple regression model with other predictors (non-executive remuneration and non-executive equity) to predict the outcome of non-executive external appointments.

The first regression model did not demonstrate agency problems had a significant relationship with multiple directorships. However, to further this analysis the regression model was adapted to include each individual agency problem to identify whether there were any significant individual agency problems. Therefore the regression model included non-exec remuneration and equity as well as the 9 individual agency problems.

These results demonstrated that three agency problems (CEO-chair duality; board meetings missed; executive equity ownership) had a significant positive relationship with non-executive external appointments. Thus where a firm has these significant agency problems increasing then the non-executives will hold more appointments. There was also one significant negative relationship with the ratio of independent directors to executives. Thus where the ratio of independent directors to executives is greater the non-executives will hold fewer appointments.

Using these significant agency problems the final stage was to create dummy variables for each firm to indicate whether a firm had either 0, 1, 2, 3 or 4 of these agency problems present in the firm. These dummy variables were then placed in to the regression model again with non-executive remuneration and equity to see if there were any significant results. The dummy variable for 0 and 4 factors were omitted since they were constant.

The results show that where the firm has more of these significant agency problems present the significance of the relationship to predicting non-executive multiple directorships also increases. As a result there is evidence available that agency problems increase the amount of external appointments for non-executives and executives are thus able to place more agency costs on the firm.

Model		Unstandardized Coefficients		Standardized Coefficients	t	Sig.
		B	Std. Error	Beta
1	(Constant)	13.048	2.095		6.227	.000
	Non-Exec Remuneration per NED	.000	.000	.223	2.850	.005
	Equity held per Non-Exec (percent)	-16.154	4.186	-.297	-3.859	.000
	One significant agency problem	1.912	1.576	.119	1.213	.227
	Two significant agency problems	2.453	1.808	.128	1.357	.177
	Three significant agency problems	7.050	2.592	.229	2.719	.007

Directors' pay: Guide to government reforms: It is not transparency it is simplification

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.

If you haven't got anything nice to say... don't say anything: The Company Remuneration Bill

Ok so the title of this post is a bit of a misnomer. I do have one good thing to say. Good thing to say about what? Well I am referring to the Company Remuneration Bill that received its first reading in the House of Lords today. The triumphant Bill consists all of four sections. This Bill is, however, unlikely to become law, see here, but below I shall highlight some problems that may be informative for any regulation the government does eventually introduce.

So let's deal with each section in turn (excluding section 4 which is merely stating its application):

Section 1(1): Decisions of remuneration committees as to the remuneration of the directors and five highest paid employees, before implementation, must be ratified by an ordinary resolution.

Comment:
I have repeatedly pointed out apathy amongst shareholders. Ok yes there has been a bit of a rebellion as of late. But if we are truly honest most of that hype has come from the media. How long will this "shareholder activism" actually last? Not long.

I have also banged on about better non-executives on remuneration committees yet there is no mention of non-executives anywhere in the Bill. Surely the pay packages that were awarded to the directors at Aviva show a complete disregard for common sense amongst non-executives. If non-executives did their job properly there would have been no need for this tighter regulation.

With that in mind there does need to be some mechanism to prevent excess beyond non-executives. As the crisis highlighted, remuneration continually rose as it was a way of attracting the best talent with no consideration of the actual amount. Thus the formation of an independent regulator whom shareholders could complain to would be more desirable surely than trying to coordinate large groups of shareholders in public companies?

Section 1(2): Such decisions MUST be voted on in a secret ballot by all the company's employees, although this is not legally binding

Comment:
Yes this is a section. You have a remuneration committee, shareholders, and now employees second guessing what you are going to get paid. So much uncertainty and so many voices. Why do the creditors not get a vote if you give one to employees? The non-executives are there to be independent and award remuneration. If they do not do their job correctly they should be fired. The term overkill is certainly coming to mind with executive remuneration.

The wording is very interesting. The words "must" and "all" seem a bit optimistic. Are all the employees really going to vote? Did all public sector workers vote whether to strike?

Section 2(1): Where a ballot is held under section 1(2) this must be reported in the following year's annual report

Comment:
Well this section slightly ignores the wording of the one prior. If the decisions must be voted on by all the company's employees then ipso facto it will need to be published under section 2(1). Surely all that needs to be said under section 2(1) is the results of the ballot must be published if one is always required to be made.

Section 2(2): The remuneration report must prominently feature the remuneration ratio between the highest paid director or employee and average remuneration of the lowest remunerated 10% of employees.

Comment:
So this is something I actually agree on. In fact I do not think it goes far enough. I feel that long term incentive plans should probably have employee remuneration criteria attached to it. As such executive remuneration should not go up when employees are made redundant. At least some publication of the ratio will put things in to perspective for directors by physically having to consider the differences.

In fact this may be great for executives if they decide to fire everyone in the lowest 10% since the ratio will decrease... certainly food for thought as to the wording and ratio to be disclosed...

Section 3: Interpretation

Comment:
OK so I wish to focus on the interpretation of one particular word. That is "remuneration". This section defines remuneration as "all rewards and benefits, including, inparticular, share options, bonuses, beneficial rights and salaries.

Well for anyone who knows even the slightest bit about remuneration this section is as confusing as it can possibly get. In the UK remuneration already has two meanings where there are already discrepancies. So this is in fact a third definition that clearly has no consideration as to the differences between the different types of compensation paid to directors. I have discussed these different definitions and award schemes elsewhere, see here.

The definition says all rewards and benefits. Well surely that includes long term incentive plans? But how do you accurately quantify long term incentive plans? A director is not given the shares in long term incentive plans upon award. He has to satisfy criteria over a three year period. If that criteria is not satisfied then the shares do not vest and the director gets nothing. So do we assess the remuneration for Long Term Plans at all when working out the ratio between highest and lowest paid in accordance with section 2(2)? Do you calculate long term plans on the value at the time of the award by multiplying share price by shares awarded; or simply go on the value of the shares that actually vest?

Long Term Plans are also not the only problem. Are pensions to be included? Pensions again are not monies paid by the company. They are merely a debt on the company's books.

Share options also suffer from the same problem as Long Term Incentive Plans. A director only gets rewarded if he exercises those options. So at what point do you assess their value?

Finally as I mentioned, how does this definition of remuneration interplay with the other two found in the Listing Rules and the 2008 Regulations? Surely three definitions of remuneration is more complicated than one. If the idea was to simplify remuneration, I would not call this a good start. The problem with trying to simplify is that it will probably make it more confusing if you attempt to generalise remuneration. Although the rules may seem complex to an outsider, to someone with knowledge of the area the purposes behind the rigid definitions and different mechanisms become clear and quite simple to understand.

My final thought is this goes to show something so true in company law. If you do not regulate yourselves properly, the government will impose something worse.