Investors back call for UK governance code to promote long-term pay and ‘malus’ provisions

UK companies should be obliged under corporate governance rules to tailor executive pay to long-term company performance and introduce ‘malus’ schemes – the opposite of bonuses – where cash can be clawed back in the event of poor results, the UK’s biggest pension fund lobby group, the National Association of Pension Funds (NAPF), and a trio of large responsible investors, Hermes, the Universities Superannuation Scheme and Railpen, have declared. The investors have come out in support of proposals by the UK’s Financial Reporting Council regulator to amend the UK Corporate Governance Code, ahead of the consultation deadline on June 27. The proposed changes to the Code, if implemented, will apply to company reporting from October 1, 2014. The FRC is carrying out a series of related consultations on directors’ remuneration (started in October 2013), and risk management, internal control and the going concern basis of accounting (November 2013). The investors have pointed up two major director pay issues in the final FRC proposals that they say will skew remuneration towards long-term, sustainable corporate strategies.They welcomed the removal of a previous requirement under UK corporate governance rules for pay to be at a level sufficient to “attract, retain and motivate” directors, because, they said, it had contributed to ratcheting pay levels based on the short-term incentives of company management rather than the interests of long-term investors. They said the new FRC recommendation that pay be designed “to promote the long-term success of the company”, better reflected a need for corporates to seek “sustainable performance” and encourage the behaviour and culture that support it. The investors said the FRC’s proposals on pay clawback and malus provisions would be useful tools for remuneration committees to take greater ownership of, and be more accountable for, pay, which they indicated they would back as shareholders: “We support remuneration committees that take a holistic approach to performance rather than applying simplistic, mechanistic formulae to determine awards to executives; the amendments to this Code Provision should make this more of a reality for more companies”.
Link to UK Corporate Governance Proposed Revisions