Large and Medium-sized Companies and Groups Regulations 2013 - A Step in the Right Direction?
So, it’s time for our
first law-related blog post and what better a place to start than a topic very
dear to my heart? With an article due to be published in a 2014 edition of the
European Business Law Review and numerous personal blog posts on a previous
matter, coupled with the 2013 Regulations, the issue of directors’ remuneration
seems like the perfect place to begin.
To start with a little
context; it has become increasingly common for journal articles and all others
forms of media to begin by referring to the most recent global recession and I shall pay respect to this recent trend. The
recession heightened pre-existing tensions in relation to the salaries taken
home by directors of public companies. The crude summary is that whilst
thousands of jobs have been axed at the lower end of the pay scale (for example
the thousands of redundancies within the commercial and retail arms of RBS) in
a bid to “reduce costs and save money” the high-earning company directors of
the same companies have seen their
bonuses inflated to levels exceeding those previously seen.
Policy makers are not
unfamiliar with this issue; the Greenbury Committee had recommended a need for
greater transparency on such reports and the need for full disclosure of
remuneration packages with the aim of allowing investors to make informed
decisions about whether or not to invest in the company. The shareholder vote,
however, remained advisory and the Board of Directors of a company could not be
legally compelled to consider. Furthermore, the disclosure requirements led to
increased competition as directors became increasingly aware of what their
peers were pocketing on an annual basis.
The issue was
considered again in 2012 by the Department for Business Innovation and Skills
(BIS) and the proposals that followed suggested giving shareholders a binding
vote on directors pay as opposed to the current advisory. In my upcoming
publications I have highlighted the flaws with this, and there are many.
Firstly, despite the shareholder spring, where shareholders were making use of
their advisory vote, most shareholders are more interested in the profits of a
company as opposed to its corporate governance structure. Secondly, many
shareholders only hold shares on a short-term basis (“buy them cheap and sell
them high”-type investors). Thirdly, shareholders are often detached from the
running of the company and so will know very little about how the performance
of the director has impacted upon the company (for example, a company could be
making a loss but without the director it could have become insolvent), I could
go on.
The Large and Medium-sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 will
apply to companies from the beginning of the new financial year. The Regulations
are indeed a step forward with regards to transparency with greater
requirements on disclosing non-salary remuneration such as scheme benefits,
pension benefits, and the said director’s shareholding. The reports will also
need to contain a statement relating to how an agreed remuneration policy is to be implemented and the performance
indicators with details of how awards will be calculated. The report must then
be put to the shareholders for a vote but their opinion retains the status of
an advisory vote.
So what to make of it?
The Regulations are a step forward but more importantly are they a step in the
right direction? It is argued that this is not the case. Disclosure
requirements have been seen through remuneration reports for a number of years,
the truth is that the remuneration is dictated by the market and less by
shareholders who tend to remain passive. This criticism is, however, qualified.
It is notoriously difficult to formulate a corporate governance strategy that
does not fuel and already raging fire. If you cut remuneration in a manner that
is inconsistent with the global market or even other professions then company
directors may walk. Time will tell whether the proposals, if approved by
Parliament, have a substantive impact on the market.
Jay Gajjar
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