The Government is heading in the right direction on board pay, says ACCA (the Association of Chartered Certified Accountants). Setting private sector board pay should remain a decision for companies themselves, but pay should always be balanced with shareholder value and company performance. Vince Cable’s intervention comes at the right time, but it should be the first step in wider efforts to promote active shareholder engagement.
‘Remuneration decisions are fundamentally a matter for companies to decide for themselves,’ says John Davies, head of technical at ACCA. ‘Decisions need to take into account the specific financial context in which a company operates, their goals, and their performance against targets. But, pay decisions need to be consistent with the best interests of the company and its shareholders, and in line with the stewardship and fiduciary responsibilities of the directors making the decisions on pay.
‘Board pay in recent years seems to have lost touch with these guiding principles; the link between pay, performance, and shareholder value has become blurred in some cases. If it can be done with flexibility, giving the shareholders the right to approve company plans on pay would be a logical extension of their ownership role and could prove to be a positive force for pay discipline.’
Vince Cable’s proposals can be a positive development, provided the legal detail is right, says ACCA. There needs to be clarity as to exactly what matters are subject to shareholder approval, boards and remuneration committees should retain the flexibility to pay market rates, and shareholder votes must be prospective in nature and should not seek to interfere with contractual agreements already entered into or payments already made.
‘Vince Cable’s proposals are certainly helpful and timely, but they should be the first step in wider efforts to promote effective shareholder engagement in the companies they own,’ says John Davies. ‘Shareholders already have a non-binding vote on board pay policy and practice, but remuneration reports generally pass unchallenged and member participation in company affairs is often low. It is clearly one thing to give shareholders powers, but another thing to get them to use those powers effectively.
‘From here the Government needs to promote a responsible and long-term approach to corporate stewardship; the key to this is bringing about a fundamental improvement in levels of engagement on the part of shareholders. Increased transparency and a clearer presentation of information might help. This has already been set in train by the Financial Reporting Council via their Stewardship Code, and I hope the momentum of these reforms continues. We also need to consider the incentives that institutional investors have on board pay: do they properly represent the interests of those who are the ultimate owners of the shares in their hands?’