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Investor backs new UK prime minister's approach to corporate governance and executive pay

Out-Law News | 22 Jul 2016 | 9:38 am | 3 min. read

A leading UK institutional investor has welcomed corporate governance reform proposals put forward by new UK prime minister Theresa May, but "careful consideration and consultation" will be required before any of these are taken forward, legal experts have said.

Fidelity International has particularly backed the introduction of annual, binding shareholder votes on executive pay, as proposed by May in a speech given two days before she became prime minister earlier this month. The current rules give shareholders a legally binding vote on future pay policy once every three years, backed by an annual shareholder vote which is not binding on the company.

Suzannah Crookes, an expert in executive remuneration and long-term incentives plans at Pinsent Masons, the law firm behind Out-Law.com, said that many of the changes proposed by May in her campaign speech were already on the "wishlists" of institutional investors. The challenge for the government would be to find a way to legislate for the changes effectively, in order to create a "workable regime for both companies and investors", she said.

"May's speech gave no further details of how an annual binding vote on pay would be achieved or its scope," she said. "[Fidelity chief executive] Dominic Rossi indicates that, in his view, any new binding annual pay vote must be forward-looking rather than relating to previous implementation of policy and existing remuneration packages. This would appear potentially to be more workable than a vote which would be an effective veto of previously-awarded pay and bonuses, which is something that investors might be reluctant to exercise as well as a cause of significant difficulty for companies."

"Just how challenging it is to legislate for the proposal effectively might depend on the company's remuneration structure. Some of the alternative LTIP [long-term incentive plan] models suggested by the Executive Remuneration Working Group in its interim report, published in April, seem potentially more compatible with an annual binding vote than the current 'standard' model," she said.

In her speech, which was given at the 'official' launch of May's national campaign to become leader of the Conservative Party and therefore prime minister, May put corporate governance reform at the centre of her vision of "a Britain that works for everyone". These reforms would include consumer and employee representatives on company boards and requiring companies to publish bonus targets and the ratio between the pay of the chief executive and the average company worker, as well as the binding annual shareholder votes, she said.

May also said that the way in which bonuses are paid should be simplified, "so that the bosses' incentives are better aligned with the long-term interests of the company and its shareholders", she said. These comments were in line with the interim recommendations of the Executive Remuneration Working Group (ERWG), which was set up by the Investment Association (IA) to propose a "radical simplification of executive pay", Crookes said. The ERWG is due to publish its final report on 26 July and the IA, which represents the interests of the asset management industry, may incorporate its final recommendations into its annual 'principles of remuneration' for members.

"In relation to long-term remuneration, Fidelity has also published a progress report on its efforts to ensure listed company executive LTIP awards do not mature for at least five years," Crookes said.

"Many listed companies have already made changes in response to Fidelity's stated intention to vote against remuneration packages which include shorter maturity periods. While Rossi indicates that Fidelity is pleased with the progress made to date on this issue, he is clear that there is further work to do. It is not clear at this stage whether May's comments are focused on this type of longer-term LTIP or some more fundamental change in LTIP structure," she said.

Allowing employee representatives onto corporate boards, and requiring companies to indicate how executive salaries compared to those of ordinary employees, were both discussed as possibilities around the time that the coalition government, led by then-business secretary Vince Cable, were putting forward proposals to reform executive pay. However, both of these changes had been dropped by the time the final remuneration reporting regulations, which came into force on 1 October 2013, were published.

"The recent US SEC rules and experience on pay multiple reporting could provide a useful point of reference in the UK debate, but there remain well-founded concerns about how useful and comparable standard pay multiples can be, and about how much effort might be required to prepare and present them," said executive remuneration expert Lynette Jacobs of Pinsent Masons.

"Full bonus target disclosure is already near the top of institutional investors' remuneration wishlists. Any reform will have to consider whether, and if so how, to retain some scope for companies to withhold, or delay disclosing, commercially sensitive details, while at the same time securing better compliance overall," she said.

Share plans and incentives expert Graeme Standen of Pinsent Masons said that May's comments about requiring consumer and employee representation on corporate boards were "much more sweeping" than those on pay and raised "all sorts of issues".

"Any such policy would require careful consideration and consultation to address business and board concerns, and to get the most out of a reformed approach to board operation and governance," he said. "But equally, there could be potential benefits if the proposal was implemented well, in terms of improving board effectiveness and strategic direction in large companies."

"It also seems possible that the policy could be helpful socially and politically, at a time of general public distrust of big business and high executive pay; and widespread public, professional and political doubt that companies and markets focus adequately on 'long term' sustainable performance," he said.