Cable hands investors binding vote on executive pay

SHAREHOLDERS HAVE been handed greater power over companies’ executive pay policies as part of a package of reforms recently announced by business secretary Vince Cable.

The government has promised the most comprehensive reforms of the framework for directors’ remuneration in a decade, which will give shareholders binding votes on pay policy and force companies to make executive remuneration policies more transparent.

Measures unveiled by Cable include forcing companies to hold a binding vote on pay policy at least once every three years. The vote will be held annually unless businesses choose to leave their remuneration policy unchanged.

Under current rules, shareholder pay votes are only advisory, which means companies can effectively ignore their investors if they so wish. Now, once a policy is approved, companies will not be able to make payments outside its scope. If a company chooses to change its pay policy, it will have to put it before shareholders for re-approval.

It was believed that Cable had intended to force a compulsory vote on boardroom pay every year. However, a spate of boardroom rows over the disparity between pay and performance has seen three FTSE chief executives – Andrew Moss at Aviva, David Brennan at AstraZeneca and Sly Bailey at Trinity Mirror – ousted from their positions, resulting Cable rowing back slightly.

“In January, we kicked off a national debate aimed at encouraging shareholders to become more actively engaged as company owners in better aligning directors’ pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained. That is why I am bringing forward legislation to strengthen the powers of shareholders through a binding vote on pay,” said Cable.

Shadow business secretary Chuka Umunna criticised the plans for falling short of demands for an annual binding vote, an option that was also favoured by investor body Pirc. However, Tom Powdrill, spokesman at Pirc, generally welcomed the announcement.

“We favoured an annual vote and we still think it could be simpler. However, the way it has been structured means there is the necessary level of accountability. There are safeguards built in,” said Powdrill.

Unnecessary vote

Not everyone was in favour of the proposals. According to Jo Iwasaki, ICAEW’s head of corporate governance, Cable’s plan to force shareholders to hold a legally binding vote on executive pay every three years is unnecessary.

“Recent events have shown that shareholders already have sufficient power to change company policy on pay if enough of them feel they need to. There is a role for legally binding votes on an ad hoc basis – for example, if a board were continuously ignoring the wishes of shareholders – but demanding them as a matter of routine could damage relations between shareholders and the remuneration committee,” she said.

“Initiatives on shareholder engagement must take into consideration the complex nature of share ownership. Shareholders should not be seen as a single, homogenous group, when they might include a range of institutional investors, hedge funds, private equity funds, sovereign wealth funds, activist investors and intermediaries including proxy agents.”

As part of their pay policy, companies will now have to clearly explain their approach to exit payments, which will also be subject to the binding vote. When a director leaves, the company will have to promptly publish a statement of payments received by the director. Companies will not be able to pay exiting directors more than shareholders have agreed.

According to Powdrill, this should go some way to curbing the risk of executives being “rewarded for failure”.

Alongside the binding policy vote, shareholders will still have an annual advisory vote on how pay policy was implemented in the previous year. If a company should fail the advisory vote, it must resubmit the pay policy to shareholders in a binding vote the following year.

Companies will have to report a single figure for the total pay received by directors for the year. This figure will cover all rewards received by directors, including bonuses and long-term incentives. They will also have to report details of whether they met performance measures as well as a comparison between company performance and chief executives’ pay.

The government intends to enact all these reforms by October 2013.