Shareholders could win the right to reject executive pay deals under European Commission proposals

Out-Law News | 09 Apr 2014 | 4:30 pm | 3 min. read

Corporate shareholders across the European Union would gain the power to reject the pay deals of their executive employees under new proposals announced by the European Commission.

The so-called "say on pay" measures would require companies to set out a maximum level for executive pay in a remuneration policy document and put the policy before a binding shareholder vote.

Remuneration policies would also have to explain the ratio between average employee pay and executive pay, and outline how pay measures would benefit the long-term interests and sustainability of the company.

But the Commission proposals would not impose a binding cap on executive pay, as has happened with banker's bonuses in the EU, a move which is being challenged by the UK government.   

The Revision of the Shareholder Rights Recommendation is the Commission's latest step to modernise company law and enhance the corporate governance of the 10,000 companies listed on stock exchanges across the European Union, following the establishment of its 2012 Action Plan.

Other proposals include increased transparency requirements for institutional investors and asset managers on their investment and engagement policies towards companies they invest in.

Proxy advisors would also face greater scrutiny under the measures. Proxy advisors – which the Commission defines as firms providing services to shareholders, notably voting advice - would be required to offer greater transparency as to the methodologies they use to prepare their voting recommendations and on how they manage conflicts of interest.

Announcing the proposals Internal Market and Services Commissioner Michel Barnier said: "The last years have shown time and time again how short-termism damages European companies and the economy. Sound corporate governance can help to change that.

"Today’s proposals will encourage shareholders to engage more with the companies they invest in, and to take a longer-term perspective of their investment. To do that, they need to have the rights to exercise proper control over management, including with a binding "say on pay"."

Christopher Mordue of Pinsent Masons, the law firm behind Out-law.com, said: “This latest initiative is a clear signal that European lawmakers have unfinished business in the areas of executive pay and corporate governance – issues which also remain under considerable public scrutiny.

"The problem for business is that regulatory intervention in this area is emerging in a very piecemeal basis at both national and European level," Mordue said. "The EU bonus cap for banks has only just come into force and this is also the first year of new rules in the UK which require greater transparency on executive pay for listed companies and binding shareholder votes on remuneration policies. Now coming hot on the heels of those reforms are EU moves to introduce greater restrictions on directors pay, greater powers for shareholders to vote down pay awards and possibly involvement for employees or unions on remuneration committees, all of which could cut across existing national laws and initiatives.

"This mushrooming regulatory burden is creating ever greater complexity and uncertainty, with the risk of legislative overkill," said Mordue."It would be better to wait and see how effective existing national initiatives on executive pay, transparency and shareholder rights are, before adding yet another layer of regulation on business.”

The Commission said that the first "European 'say on pay'" is designed to increase transparency on pay policies of listed companies and enhance shareholder engagement to benefit the long-term welfare of companies.

"Today, there is an insufficient link between management pay and performance and this encourages harmful short-term tendencies," said a Commission statement. "The proposals would oblige companies to disclose clear, comparable and comprehensive information on their remuneration policies and how they were put into practice."

The Commission also announced proposals to "improve the overall quality of corporate governance statements published by companies". This would require companies that depart from the applicable corporate governance code to provide appropriate explanations for the departure.

The Commission also announced proposals for a Directive on single-member private limited liability companies designed to make it easier for small and medium-sized enterprises (SMEs) to establish subsidiaries and operate in other EU states. Currently only 2% of SMEs establish subsidiaries abroad, according to the Commission.

Announcing the SME Directive proposal, Barnier said: "I also see it as a priority that company law offers European SMEs an efficient framework for their operations and growth. The European Single-Member Company will help entrepreneurs reduce costs and organise their activities abroad.”