Shareholder voting rights

Comments from ACCA to the Department of Business, Innovation and Skills, 24 April 2012.




ACCA is a professional accountancy body that represents over 150,000 members who work in business, public practice and the public sector in the UK and around the world. We are committed to promoting transparency in corporate reporting and a responsible approach to corporate governance which focuses on long-term and sustainable growth. Our comments in this letter reflect this perspective.   

In principle, the pay of directors and staff in limited companies should be an internal matter for each company to deal with as it sees fit. Companies operate in a competitive environment and they should be entitled to frame their remuneration policies and practices in a way which they think best enables them to achieve their objectives and to gain a competitive edge: this must include having the freedom to pay the prevailing market rate for talented people where they can justify doing so. 

ACCA agrees, however, that there is sufficient cause for concern about levels of pay in the listed company sector to justify a regulatory response at this time. 

There is now clear evidence that executive pay in the biggest companies has achieved its own momentum, and the essential connection between performance and reward is being lost. The remit of companies is to create wealth for their shareholders, but pay levels have in recent years risen substantially out of proportion to share prices and company performance and there is serious room for doubt as to whether freedom to pay the market rate is resulting in packages which properly link risk to reward.  

Ideally this situation should be capable of being addressed by a combination of directors abiding by their fiduciary duties and shareholders exercising their supervisory rights – as generally happens in private companies. But the increasing disconnect between performance and pay in the largest companies is an indicator of the structural inability of the ownership base of such companies to exert meaningful control over board decisions – in this case, in respect of the creation of pay structures that impose stretching performance targets and which link reward to the financial position of the company. 

This failure cannot be put down simply to the general indifference of shareholders. It is also a function of the increasingly diverse and fragmented landscape of share ownership in major UK companies, a situation which makes it difficult for the company’s ownership base to act as an effective supervisory force. As a recent report by Fair Pensions has pointed out, another dimension which contributes to the picture of ineffectual supervision is that fiduciary investors often lack the legal confidence to be able to insist that companies pursue policies and practices that focus on long term growth rather than the short term targets which, arguably, too often drive remuneration practice. In the context of pay, this dysfunctional situation has enabled some boards to adopt pay practices that appear to be not adequately restrained by ownership concerns. 

The aim of any regulatory response now must therefore be to reinforce the capacity of the ownership base to insist that company boards incentivise and reward their personnel in a way that is consistent with directors’ fiduciary duties and with their companies’ financial well-being, and without impeding boards and remuneration committees’ ability to pay an objectively justifiable rate for the right people. The ultimate public interest value of doing this must be to redress the apparent state of disconnect which has arisen between boards on the one hand and their employees, shareholders and the rest of the community on the other. 

While giving more rights to shareholders on this matter has the potential to address current concerns, however, it should not be seen as a panacea. Experience of the operation of the non-binding and retrospective vote on board pay policy and practice tells us that the great majority of remuneration reports currently pass, and it is even rare for significant levels of opposition to be recorded. As with other areas of governance and company law, it is clearly one thing to give shareholders powers, but another thing to get them to use those powers pro-actively and with purpose.    

So simply changing the vote from retrospective to pro-active approval cannot in itself be guaranteed to have a decisive impact on excessive levels of pay, especially if policy statements are able to be framed in very broad and flexible ways. 

Reform in this particular area must be seen as one part of a wider package which promotes a responsible and long term approach to corporate stewardship. Key to this is to bring about a fundamental improvement in levels of engagement on the part of shareholders, a process which has already been set in train by the FRC via its Stewardship Code: vigilance and pro-active engagement on the part of investors must be an essential element in the resolution of this issue. Giving investors an express right of intervention could help to enhance the quality of stewardship by ensuring that directors are more mindful of how pay packages are likely to be viewed by the company’s owners. 

But other regulatory initiatives need to be considered. The statement of directors’ duties in s172 of the Companies Act should be reviewed with a view to imposing a more explicit onus to directors to consider long term shareholder value in the course of setting pay policy. Remuneration committees should be encouraged to set criteria for assessing performance which reflect the board’s collective responsibility for stewardship and which are linked to indicators of sustainable growth. We need to consider the structure of remuneration committees, many of which are comprised exclusively of current or former executive directors, a state of affairs which might suggest a tendency towards tolerance of very high pay awards; in the light of the Kay review, we also need to consider whether there are currently so many links in the investment chain that the situation effectively impedes the ability of institutional shareholders to exert effective influence.   

As regards the promised regulations to govern the structure and content of remuneration policy statements, getting the legal detail right will be crucial, especially if the shareholders are to vote on the policy overall, meaning that one major issue of disagreement would risk the whole of the policy being defeated. There will need to be clarity as to exactly what matters are to be part of the statement which is to be subjected to shareholder approval. 

Any new shareholder vote must also be prospective in nature, and should not seek to interfere with contractual agreements already entered into and payments already made. It should be feasible, for example, for members to be invited to approve plans for future incentive schemes, performance targets and severance payments; it would not be feasible to seek to overturn packages, and pension rights, to which a contractual right had already been granted. 

Comments to specific questions 

1. The Government proposes to require an annual binding vote on remuneration policy. What are the costs and benefits of this approach? 

The main potential virtue of a regular binding vote is that it could have the desired effect of curtailing excessively generous pay awards by individual companies. The knowledge that a proposed policy on pay would be subjected to critical prospective evaluation by shareholders could contribute to a more sober approach to pay on the part of remuneration committees and boards. 

Where a policy statement has been approved by shareholders the committee and the board will have the comfort of knowing that it can avoid the damaging situation which frequently arises towards the year end at present where shareholder groups respond publicly and aggressively to pay awards of which they disapprove. A binding vote could also have the governance benefit of encouraging greater levels of interest and engagement of shareholders in company affairs, an outcome which could, potentially, prove to be a positive development on a wider governance level.  

As regards costs, companies would invariably have to increase the attention that they devote to investor liaison before putting their plans to the shareholder vote. While this will be no bad thing in principle, it will take up a significant amount of management time. Another cost would stem from the state of uncertainty that would ensue where shareholders refuse to approve a board’s plans. This uncertainty would impact on its ability to negotiate and make new appointments during that period and necessitate urgent attention to making amendments to the defeated plans.  

As regards the annual dimension of the proposal, we suggest that the recurring costs, and the potentially damaging and distracting consequences of failure to carry the shareholder vote, must be taken into account. As a hybrid between the proposed annual vote and the approach taken in the Netherlands, we suggest the adoption of a binding vote on a triennial basis, with shareholders being asked to vote prospectively on the board’s policy plan once every three years. The regulations could empower shareholders to give boards the freedom to make changes to the plan, either without restriction or within stated parameters, but on condition that where any changes were made in the intervening period, the board should be required to make specific disclosure of those changes in its remuneration report: these should be capable of being voted on on the current, non-binding basis. Together with the Government’s proposal to require a market statement to be issued where material dissent was expressed in the latter vote, this idea would still incentivise boards not to depart from the agreed policy framework without good reason. This approach would in our view represent a more proportionate solution than to have policy plans submitted for prior approval every single year. 

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? 

If a binding prospective vote is to be adopted, then obviously a defeat at the hands of the shareholders must have consequences. The directors will have no authority to implement any of the regulated elements of a plan that has not been endorsed at the AGM. Contingency plans should thus be in place. 

As a fall-back provision, the continuance by default of the existing plan sounds reasonable. But if this is to work, the standard contents of the policy must be such as to be capable of being carried forward on a stand-alone basis. It may be unrealistic to expect a previous period’s plan to be carried forward if that policy is explicitly linked to factors, such as strategic objectives and KPIs, which have since changed or are in the process of being changed. This is in itself an argument for ensuring the policy plans are able to be framed in such a way as to be free-standing. 

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? 

Specific contractual entitlements which have already been entered into should survive the introduction of the new provisions unless they have been freely amended. Going forward, it is right that provisions which entitle directors to specified amounts of remuneration, variable or otherwise, should be subject to the shareholder vote. Work on amending these contracts, between now and the implementation of any new regulations, will inevitably result in the expense of time and cost. 

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? 

It seems likely that the imposition of a binding prospective vote will inhibit companies’ ability to offer above-market terms to prospective directors during the duration of the plan’s approval. But this is an inevitable consequence of a move to impose new controls on board level pay. The consultative document seems to suggest that the promised statutory regulations governing the framing of policy statements may allow for a measure of flexibility. While this would be welcome in principle, the rules must not be so flexible as to make the new powers of control redundant. 

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? 


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?

There is a danger that imposing a high qualified majority threshold for the proposed shareholder vote would add to the complications surrounding the regulation of boardroom pay. The special resolution procedure is generally used in relation to constitutional issues or issues of major and infrequent importance to the running of a company. It would be a significant departure if a special resolution threshold, or any qualified majority threshold, were applied to an issue which is at present entirely within the accepted scope of directors’ management powers. At this stage, the introduction of even a simple majority for validating pay would be such a significant development, at least within company law, that we do not see it as being appropriate to impose a higher threshold. In any case, as stated earlier, we do not see that a binding shareholder vote on pay, in isolation, will achieve the desired improvements in boardroom practice. The position could be kept under review: if a simple majority was in due course seen as being ineffectual in terms of introducing greater discipline to the determination of boardroom pay, the 50% threshold could be reviewed and increased. 

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? 

We agree with the proposal to retain a retrospective vote on pay practice, to include an explanation of how the previous advisory vote be taken into account. With respect to the proposal to require a market statement on the expression of significant shareholder dissent, this should be triggered by a specified threshold of votes against, which we suggest should be set at 10%. 

Q8. 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? 

This seems reasonable.  

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. 

No comment. 

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? 

The amendment of contracts will incur time and cost for companies but will be essential to ensure that they are consistent with the proposed new law. 

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? 

Yes. Any existing contractual entitlements which are not freely amended should not be covered by the proposed reforms. 

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?






Last updated: 12 Jun 2013