Earlier this year we reported on the UK Government's proposals to give shareholders of companies greater influence over executive pay through the use of binding votes.
Since the draft proposals were announced the UK has seen the so-called "Shareholder Spring" with majority votes against remuneration reports under the current 'advisory' (non-binding) regime at Aviva, Cairn Energy, Pendragon, and WPP; and sizeable votes against the reports at Xstrata (40% against), Barclays, Cookson and UBM (approx. 25% or more against) amongst others.
Building on the momentum created by shareholders on June 20, 2012, the UK Government announced its detailed proposals for a far-reaching reform of the approval mechanism for executive pay, including the use of binding votes. The proposals will likely apply (we await detail) to so-called 'quoted companies' (see further below).
The UK Government's proposals are summarised below:
- Binding Vote on Executive Pay Policy. The UK Government has said that it will enact legislation to give shareholders a binding vote on a company's policy for director pay. The vote will require an ordinary resolution to pass. It seems that the Government has resisted calls to increase the majority required to pass such resolutions to a threshold above that required to pass an ordinary resolution (50%) but below that required for a special resolution (75%).
The binding vote will be held annually unless companies choose to leave their remuneration policy unchanged in which case it will be compulsory to have a vote at least every three years. Once a policy is approved, companies will not be able to make payments outside its scope without re-approval. The Government hopes this will encourage companies to devise long-term policies.
The policy report will include the following:
- A table setting out the key elements of pay and supporting information, including how each supports the achievement of the company's strategy, the maximum potential value and performance metrics.
- Information on employment contracts.
- Scenarios for what directors will get paid for performance that is above, on and below target.
- Information on the percentage change in profit, dividends and the overall spend on pay.
- The principles on which exit payments will be made, including how they will be calculated; whether the company will distinguish between types of leaver or the circumstances of exit and how performance will be taken into account.
- Material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.
The Government's press release also states that companies will have to give better information on how directors' pay compares to the wider workforce. This may well presage a requirement to disclose what multiple of average or median workforce pay that the pay of the CEO or executive directors represents.
- Exit Payments. The Government is very concerned to end the perceived problem of 'payments for failure'. It has announced that when a director leaves a company, the company will have to promptly publish a statement of payments the director has received. Companies will not be able to pay exiting directors more than shareholders have agreed.
- Advisory Vote on Policy Implementation. In addition to the binding vote on pay policy, companies will continue to have an annual advisory (i.e., non-binding) vote on how pay policy was implemented in the previous year, including actual sums paid to directors. If a company's advisory vote does not pass, the company will be required to hold a binding shareholder vote on its overall pay policy the following year. The Financial Reporting Council (FRC) has been invited to develop proposals on updating the UK Corporate Governance Code, for example, to require companies to make a statement where a significant minority of shareholders vote against a pay resolution. The FRC has also issued a report on how a 'single figure' for remuneration might be calculated.
In order to make it easier to understand the overall impact of practices on pay, companies will have to report a single figure for the total pay directors have received for the prior year to include all rewards (covering base pay, bonus, long-term rewards). Companies will also have to be transparent and proactive in disclosing whether executives have met performance measures and they will have to show comparisons between the company's performance and the CEO's pay.
The UK Government has said it will implement the measures by way of amendment to the Enterprise and Regulatory Reform Bill currently before Parliament. It intends to enact these reforms by October 2013.
Although enactment of the reforms is still some way off, we recommend that quoted companies to whom the provisions will apply begin to 'forward test' policies and practices to see how they will appear and be reported upon under the new rules. Proactive engagement with shareholders and their advisory groups will become more important than ever since the consequences of losing a remuneration vote will no longer be mere embarrassment but will be a legal block on changes to remuneration policy.
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It is likely that, as now, the rules will apply to 'quoted companies' (that is, a UK company whose equity shares are included in the Official List, or which are officially listed in the EEA, or whose shares are admitted to dealing on the NYSE or Nasdaq).
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you work, or any of the following lawyers:
© 2012 Gibson, Dunn & Crutcher LLP
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