Company directors should hold shares for 10 years says £900bn UK pension fund association

Recommendations come ahead of binding shareholder vote on remuneration next year.

Company directors should be made to invest in shares and hold on to these and any stock grants for a minimum of ten years, whether or not they are in post, according to a significant recommendation put forward in a report jointly authored by the powerful UK National Association of Pension Funds (NAPF), which represents retirement assets of more than £900bn. For the report, the NAPF allied with some of the country’s biggest institutional investors, including Hermes Equity Ownership Services (EOS), the BT Pension Scheme, RPMI Railpen and USS Investment Management. The report comes ahead of the introduction of a binding vote by UK shareholders on remuneration policy next year. The ten-year proposal, the investors said, would encourage director succession planning and reduce the need for ‘golden hellos’ for new directors. The report sets out three other principles for companies to adopt. The second recommendation is for pay across the company to be aligned to long-term success and consistent throughout the company, or justified if not. Thirdly, the investors said pay schemes should be simple and understandable and that large awards should not be paid to directors when returns toshareholders are below the cost of capital. Finally, they said remuneration committees should justify how their decisions back long-term business success, and should scale back or eliminate awards based on aggressive accounting or high leverage, or if the company has suffered reputational damage. The NAPF and Hermes EOS will host a number of working seminars with corporate remuneration committee chairs and shareholders to discuss the four principles and refine the document. Joanne Segars, Chief Executive of the NAPF said: “We have become increasingly concerned by the complexity of many spiralling pay deals. We need to see change, and it is encouraging that many companies agree. Shareholders want a much simpler approach that nails boardroom pay to the long-term health of a business. Paying executives proportionally more in shares that are owned for a long time could help align pay with shareholder interests. A chief executive who is partly paid in shares that are held for a decade will think in a timeframe that goes well beyond their leaving party. They are likely to be more focused on the long-term strategic direction of the business, and to plan a smooth succession.”