The Government should take steps to regulate listed company executive pay, says ACCA in its response to the Department of Business, Innovation & Skills’ consultation on high pay.
The accountancy body is concerned that executive pay at the largest companies has achieved its own momentum and that the essential connection between pay and reward is being lost. ACCA argues that a regulatory response should reinforce the capacity of company shareholders to insist boards incentivise their personnel in sustainable ways, without impeding boards and remuneration committees’ ability to pay objectively justifiable rates for the right people.
‘A disconnect has arisen between boards, their employees, shareholders, and the rest of the community,’ says John Davies, head of technical at ACCA. ‘In principle, pay should be an internal decision for companies and there should be freedom to pay the prevailing market rate for talented people. However, today, high pay seems to justify itself, while shareholders seem to have little control over management decisions. This is a structural problem which needs proper reform.’
ACCA argues that:
1. There is a structural inability of the ownership base of some listed companies to exert meaningful control over board decisions. This isn’t completely down to shareholder apathy: the fragmented landscape of share ownership and a lack of shareholder confidence in their right to insist on policies that pursue long-term growth are also at fault.
2. Switching from a retrospective shareholder vote on pay to a binding, pro-active one – as mooted by the Government – would not change anything by itself. Giving more rights to shareholders would not be a panacea as new powers won’t necessarily be used, as previous experience has shown. Equally, it would not prevent policy statements framed in broad, flexible ways being put to the vote. On this specific point, a binding vote on a triennial basis would be a more proportionate response than a yearly vote anyway: it would provide more freedom for boards provided they disclosed any changes made to policy between votes and made a market statement where material dissent was expressed in votes
3. Reform needs to be part of a wider package.
a. The statement of directors duties in s172 of the Companies Act should be reviewed to impose a more explicit onus on directors to consider long-term shareholder value when setting pay policy
b. Remuneration committees should be encouraged to set criteria for assessing performance that reflect the board’s responsibility for stewardship
c. The make-up of remuneration committees needs to be considered. These are currently comprised almost exclusively of current or former executive directors, embedding a culture of high pay
d. There needs to be a fundamental improvement in levels of engagement by shareholders – a process already begun by the Financial Reporting Council’s ‘Stewardship Code’. Giving investors an express right of intervention on pay policy could help enhance the quality of shareholder stewardship.
4. Getting the legal detail right is crucial.
a. Regulation needs to be clear, especially if shareholders are asked to vote on overall policies, meaning that one major disagreement would risk the whole of the policy being defeated. What happens next?
b. Any new shareholder vote must be prospective in nature and should not interfere with contractual agreements already entered into and payments already made
The consultation – the Executive Pay Consultation – was set up by the Department of Business Innovation & Skills and is headed by Barry Walker. The consultation closes on Friday 27 April and following the consultation, the Government will announce final proposals for enhanced shareholder voting rights in early summer.
John Davies concludes: ‘Ideally, excessively high pay should be capable of being addressed by a combination of directors abiding by their fiduciary duties and shareholders exercising their supervisory rights. Unfortunately, the reality is quite different and so the time has come for regulation. This regulation needs to be proportionate, allowing freedom for boards and encouraging shareholder engagement. We need to bridge the gap between companies, their shareholders, and the public, and regulation seems to be the only answer.’