EXECUTIVE PAY: SHAREHOLDER VOTING RIGHTS CONSULTATION

Transcription

1 27 April Barry Walker Executive Pay Consultation Department of Business, Innovation and Skills 1 Victoria Street SW1H 0ET Dear Mr. Walker EXECUTIVE PAY: SHAREHOLDER VOTING RIGHTS CONSULTATION IMA represents the asset management industry operating in the UK. Our members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of 4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, the Annual IMA Asset Management Survey shows that IMA members managed holdings amounting to just over 40 per cent of the domestic equity market. In managing assets for both retail and institutional investors, IMA members are major investors in companies whose securities are traded on regulated markets. How the executive directors of those companies are incentivised can be an important driver of company behaviour. We recognise measures are needed to strengthen accountability and address excesses in executive directors remuneration. In particular, we would welcome improved transparency and a clearer link between pay and performance. The Consultation Paper proposes that the current advisory vote is retained. We welcome this as it serves as an opportunity to comment on the structure of the remuneration package and how it was implemented, and the proposed improved accountability in that if the advisory vote receives less than 75 per cent support, the company is to be required to produce a statement within 30 days as to the main issues raised and how it intends to work with shareholders to address concerns. The Paper also proposes to improve shareholder rights through an annual binding vote on remuneration policy and binding votes on certain exit payments. In principle, we welcome such measures as they would be likely to improve the engagement between companies and 65 Kings wa y Lo nd on W C2B 6TD Tel:+44 0) Fax:+44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 shareholders on remuneration issues, and encourage both sides to give more consideration to these matters. However, there are concerns about certain of the practical implications and the impact on the international competitiveness of the UK as a place to do business. We set out in the attached Annex our answers to the questions raised and below our main points. The proposals on binding votes are to apply to all UK incorporated quoted companies and would have resource and cost implications for both shareholders and companies. Shareholders primary objective is to secure returns from sustainable business success for the benefit of their clients and/or underlying beneficiaries. Whilst ensuring appropriate incentives for executives form an important part of this, there is a concern that these proposals could divert shareholders resources from issues such as strategy and performance that more often directly impact value. The majority of votes at company meetings tend to be on quite specific issues reelection of a director, approval of the report and accounts etc - but it is intended the binding vote on future pay policy is on a remuneration framework. Whilst it is important that companies have flexibility to determine the remuneration of their executives, there is risk that within this framework they could set broad pay policies such that contentious issues are obscured and the objective of the binding vote undermined. A binding vote on future policy could also constrain recruitment negotiations especially when a company is competing in a global market for exceptional talent. External hires can come at a greater cost but companies would not necessarily be able to guarantee a newly recruited director a particular remuneration scheme or level of remuneration. A template is needed for the level of detail the resolution should contain too little and it could become boilerplate and too much would marginalise the Remuneration Committee. If the remuneration policy fails to win support, it is proposed that the company falls back on its last policy or calls an Extraordinary General Meeting within 90 days. This latter option would be costly and with the notice periods and consultation necessary is too short a time frame. Government should not seek to be prescriptive about the need to amend existing contracts in that it should be for boards to decide what works best for them and their shareholders. Amending existing contracts could potentially be destablising for a company, and as far as possible these requirements, particularly those in relation to exit payments, should be grandfathered rather than existing contracts amended. Remuneration policies should continue to require a majority vote of 50 per cent in that there are concerns that there would be unintended consequences with a 75 per cent threshold - minorities could block policies approved by the majority and it may deter some shareholders from voting against due to the increased weight such votes carry. In this context, certain of our members are proposing an alternative to the binding vote in their own submissions whereby if the advisory vote receives less than 75 per cent support, the company would be required to seek shareholders views, and review its remuneration policies to address concerns and then put them to a binding vote no later than the next AGM. Payments for failure remain an issue and whilst in principle we support a binding vote on exit payments, the basis proposed has legal and practical issues such that we do not consider it should be pursued in its current form. For example, for a genuine loss of office, it can be unclear what contractual payments would be due and what likely compensation could be awarded in respect of any unfair dismissal or discrimination

3 claim. It can often be better to reach negotiated settlement so that executives leave on mutually acceptable terms. Also deferred payments should be excluded from the calculation of one year s salary. These have already been earned in all but name and including them would be a disincentive for deferred payment structures going forward and encourage short-termism by companies. Nor is it clear whether the vote is at an Annual or Extraordinary General Meeting. Due to the costs involved, this should be at the next Annual General Meeting, albeit that it may mean that the director concerned has to wait for payment. Due to certain of the practical issues with the proposals, we would welcome the opportunity of discussing them with you further as they are developed. We also consider it would be helpful if once the proposals are finalised, BIS undertook to review the effectiveness of the additional votes after a suitable timeframe, say two or three years, to see whether the policy objective sought has been achieved. Please contact me if you would like clarification on any of the points in this letter or if you would like to discuss any issues further. Yours sincerely Liz Murrall Director, Corporate Governance and Reporting

4 1. The Government proposes to require an annual binding vote on remuneration policy. What are the costs and benefits of this approach? An annual binding vote on remuneration policy would be likely to improve engagement between companies and shareholders on remuneration issues and encourage both sides to consider the issue more. It would empower shareholders in that companies would become more responsive to their concerns and consult them more. It would also encourage remuneration committees to set out their vision and better align pay with strategy and long term value creation. However, there are concerns about the practicalities of such a vote as set out below. We understand that the requirement is to apply to all UK incorporated quoted companies of which there are around If all these companies were to consult with their shareholders it would have resource and cost implications for both shareholders and companies. As regards shareholders, their primary objective is to secure returns from sustainable business success for the benefit of their clients and/or underlying beneficiaries. Whilst ensuring appropriate incentives for executives form an important part of this, there is a concern that these proposals could divert shareholders resources from issues such as strategy and performance that more often directly impact value. It could drive responsibility for remuneration structures, policies and practices away from a company's remuneration committee towards a company's shareholders. Unlike remuneration committee members, shareholders are not privy to the insider knowledge of a company or the attributes of the key individuals within a company, which is necessary for designing appropriate remuneration structures, policies and practices. The majority of votes at company meetings tend to be on quite specific issues reelection of a director, approval of the report and accounts etc. Paragraph 6 of the Paper makes it clear that it is intended the binding vote is on a remuneration framework. We support this in that it is important that companies have flexibility to determine executive remuneration. However, there is risk that companies would seek to set broad pay policies that potentially obscure contentious issues, undermining the binding vote and frustrating the objective now being sought. A template is needed for the level of detail the resolution should contain too little and it could become boilerplate and too much would marginalise the Remuneration Committee. The proposals could constrain recruitment negotiations, especially when a company is competing in a global market for exceptional talent. It would be a concern if a company could not guarantee a newly recruited director a particular remuneration scheme or level of remuneration such that any policy that is put forward for approval needs to have sufficient flexibility to allow for this. The Paper draws a comparison with the Netherlands which has a binding vote on remuneration. However, ownership is not as dispersed as in Anglo-Saxon companies 1. The Netherlands also operates a two-tier structure such that there is a distance between executive board members and non-executive board members as opposed to the Anglo- 1 compensation%20in%20the%20nl%20-%20rsm%20hewitt% pdf.

5 Saxon one-tier model. Even in the Netherlands there is only a binding vote when substantial changes are proposed and whilst certain of our members would welcome the proposal being modified so that the binding vote is only on material changes, defining what is meant by material or substantial has difficulties. Whilst in general we welcome the current advisory vote being retained and consider that in the main the votes binding votes on future pay and certain exit payments, and an advisory vote on how the remuneration policy was implemented will be voted the same way, the fact that there will be three votes runs the risk that companies receive conflicting advice. 2. In the event that a company fails the binding vote on remuneration policy, the Government proposes that it maintains its existing policy or returns to shareholders with amended proposals within 90 days. What are the costs and benefits of this approach? Subject to our reservations under question 1, we consider that there would be few instances when a company would fail to receive support in that it will mitigate by increasing its engagement on its remuneration proposals in advance. In the event that its policy fails to win support, it is proposed that the company either falls back on its last policy or holds an Extraordinary General Meeting within 90 days of the Annual General Meeting. However as acknowledged in the Paper, this does not address the situation where the last policy is no longer acceptable. The proposal in paragraph 70, that in such circumstances, shareholders should use other votes such as the re-election of directors reflects the status quo and questions the purpose of introducing a binding vote. The alternative and calling an Extraordinary General Meeting within 90 days would be costly. Moreover, with the notice periods and consultation that would be necessary 90 days is too short a time frame. We agree with the Consultation Paper that other enforcement measures such as are applied to political donations and expenditure, and unlawful loans to directors are not necessary in the case of remuneration. 3. The Government proposes that directors service contracts and other arrangements should, if necessary, be amended to take account of the new requirement to seek shareholder approval of remuneration policy. What are the costs and benefits of this approach? In essence, we do not consider that Government should necessarily be prescriptive about the need to amend existing contracts in that it should be for boards to decide what works best for them and their shareholders. In the event that it is considered necessary, whilst allowing until October 2013 should be sufficient time, it will come at a cost and could be potentially destablising for a company. 4. The Government proposes that remuneration packages offered to in-year recruits should be confined by the limits and structures set out in the agreed remuneration policy. What are the costs and benefits of this approach? As noted under question 1, a company would not necessarily be able to guarantee a newly recruited director a particular remuneration scheme or level of remuneration. External hires

6 can come at a greater cost and this could constrain recruitment negotiations. For example, as a practicality when recruiting new executives companies often have to compensate them for the loss of any incentives schemes their previous employer offered. 5. The Government proposes that the report on future remuneration policy should provide more details on how approved LTIPs will operate for directors in that particular year. Do you agree with this approach? IMA supports the annual binding vote complementing the requirement under the Listing Rules whereby UK incorporated, premium listed companies seek binding shareholder approval before a LTIP is adopted. They set out the terms in a circular that typically includes an indication of how performance will be measured and discretion to grant different types of share-based awards and vary performance conditions. The circular also tends to explain eligibility to participate, maximum levels of award for individuals and share dilution limits. Approval to renew or introduce new LTIPs approximately is generally sought every five years and investor guidelines recommend a maximum ten year renewal cycle. Thus the annual binding vote should approve the detail as to how such schemes will operate in practice and the various criteria applied. 6. The Government proposes to increase the level of shareholder support that should be required to pass the vote on future remuneration policy. Do you agree with this approach and if so, what would be an appropriate threshold? IMA considers remuneration policies should continue to require a majority vote of 50 per cent. There are concerns that there would be unintended consequences with a 75 per cent threshold in that minorities could block policies approved by the majority. It may also deter some shareholders from voting against due to the increased weight such votes carry and detract from the main objective of seeking to improve dialogue. A 75 per cent threshold should be reserved for those issues currently dealt with by special resolution such as changes to the articles, disapplying pre-emption rights etc. In the event that is felt necessary to move to a higher threshold than 50 per cent then a possibility would be that a vote against at a certain level, say, per cent would mean that the company would have to undertake further engagement or issue a statement on how it is proposing to address the concerns raised. Moreover, whilst we agree with paragraph 88 that the proportion of shares owned by domestic institutional investors, such as insurance companies and pension funds, has declined significantly to 25 per cent, this ignores the increasing proportion of the domestic market owned by UK institutional investors of collectives which now account for around 15 cent of the UK market. As stated in our opening paragraph, IMA members manage holdings amounting to just over 40 per cent of the domestic equity market. An area where there is scope for further clarification is in respect of the role of withheld votes or abstentions. In particular, paragraph 47 of the Paper states that in the FTSE 100 alone, fifteen companies saw more than one fifth of their shareholders withhold support for remuneration proposals. However, such votes are not always considered and reported consistently and yet provide an important means whiter shareholders can send a constructive signal to a company. Any new provisions should clarify that such votes should be tank account of and reported.

7 7. The Government proposes to require companies to explain how the results of the advisory vote have been taken into account the following year and to issue a statement to the market sooner than this where there is a significant level of shareholder dissent. What are the costs and benefits of this approach? The current advisory vote serves as an opportunity to comment on the overall structure of the remuneration package and how it was implemented in the year and we welcome it being retained. As well as requiring companies to explain how the results of the advisory vote have been taken into account the following year, we welcome the improved accountability that, in the event the advisory vote receives less than 75 per cent support, the company is required to produce a statement within 30 days as to the main issues raised and how it intends to work with shareholders to address concerns. We believe that should the statement fail to satisfy investors then they will be likely to engage further and escalate their concerns in a manner that may ultimately result in a vote against the re-appointment of members of the remuneration committee at the next AGM. In this context, we do not support the company giving a statement of the proportion of all shareholders voting for, against and abstained (text box following paragraph 106) in that as not all shares are voted, this should be the proportion of votes for, against and abstained. 8. The Government proposes to give shareholder a binding vote on exit payments of more than one year s base salary. Do you agree with this approach or would an alternative threshold for requiring a shareholder vote be more appropriate? In principle, IMA support a binding shareholder vote on exit payments of more than one year s base salary in that it would give shareholders a mechanism where they could seek to address payments for failure. However, the basis proposed has legal and practical issues such that we do not consider it should be pursued in its current form. It could also have the effect of ramping up base pay and starting salaries and more clarity is needed as to when an exit payment becomes due. Certain of the issues are: Paragraph 123 states that it should apply when a director s contract has been terminated early without due notice, either by the company or by the director. This would seem to indicate that if a director resigns to take up another position and it is decided that he should not serve his contractual notice period then an exit payment will be paid. We do not believe it should. Deferred payments should be excluded from the calculation of one year s salary. These have already been earned in all but name and including them would be a disincentive for deferred payment structures going forward and encourage short-termism by companies. For a genuine loss of office, it can be unclear what contractual payments would be due and what likely compensation could be awarded in addition in respect of any unfair dismissal or discrimination claim. It can often be better to reach negotiated settlement so that they leave on mutually acceptable terms. There would be no incentive for shareholders to approve an exit payment retrospectively when an executive is no longer employed. Paragraph 124 states that companies would be required to get approval from shareholders by way of an ordinary resolution at a general meeting. It is not clear whether it is proposed that this should be at an Annual or an Extraordinary General Meeting. Due to the costs involved, our preference is that this should be a vote at the next Annual General

8 Meeting, albeit that it may mean that the director concerned has to wait for payment. In conclusion, whilst in principle we support a binding vote on exit payments of more than one year s salary, the basis proposed has legal and practical issues such that we do not consider it should be pursued in its current form. 9. The Government recognises that the circumstances under which a director leaves their post are complex and diverse and so invites feedback on the appropriate scope and breadth of the proposed legislative measures. See question 10 above. 10. The Government proposes that directors service contracts and other arrangements should be amended to take account of the new requirement to seek shareholder approval for exit payments over one year s base salary. What are the costs and benefits of this approach? As noted in question 3, Government should not seek to be prescriptive about the need to amend existing contracts in that it should be for boards to decide what works best for them and their shareholders. In the event that it is considered necessary, whilst allowing until October 2013 should be sufficient time, it will come at a cost and could be potentially destablising for a company. Thus as far as possible these requirements, particularly those in relation to exit payments, should be grandfathered rather than existing contracts amended. 11. The Government notes that a small number of directors could be entitled to generous pension enhancements if their contract is terminated early. It proposes not to legislate to override these rights, owing to the rarity of such arrangements and the complexity of legislation that would be required. Do you agree with this approach? Due to the limited number of arrangements where directors could be entitled to generous pension enhancements if their contract is terminated early, the complexity of legislation that would be required and on the basis that new arrangements would be caught by the proposals in the Paper, we agree that the Government should not seek to address them. 12. The Government proposes to leave unchanged the existing requirement in company law (section 188 of the Companies Act) to get members approval for notice periods of more than two years. Do you agree with this approach? IMA agrees that the existing requirement in company law (section 188 of the Companies Act) for shareholder approval for notice periods of more than two years should remain unchanged. This section limits the duration of directors service contracts, without the members having to remove a director using the procedure in section 168 (ordinary resolution to remove director) while allowing them to approve longer arrangements if they wish.