UK confirms binding shareholder votes on future executive pay

Government issues measures to address pay “disconnect”

The UK government today introduced mandatory binding shareholder votes on future executive pay as part of a package of measures to address what Business Secretary Vince Cable called “a disconnect” between company pay and performance.

“No proposal on its own is a magic bullet but together they can enable a major transformation to get underway,” Cable told MPs. “Shareholders need new powers to hold the board to account and I will consult shortly on specific proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards.” Investors had argued that binding votes on already agreed pay could prove unworkable in practice.

In addition, companies will have to introduce a statement on how they’ve taken investor votes into account.
The package was a “more coherent framework in which executive pay is agreed” Cable said.
He added he would consult on the threshold level for the votes, suggesting the 75% level – recently floated by Fidelity – could be appropriate.

Firms will also have to introduce “clawback” measures into executive contracts so they have some redress against poorly performing executives. The Financial Reporting Council watchdog would be asked to revise the corporate governance code on this.

But the proposals rejected the idea of including employees on company remuneration committees, which Cable argued would be unworkable in the UK context although it would “very desirable” in theory. “There is a specific set of problems mandating workers on boards,” he said.The proposals also call for companies’ remuneration reports to be easier to understand. All director salaries will have to be published. Cable also wanted to encourage greater board diversity. And he wanted to redress the problem of executive directors serving on remuneration committees of other companies, but not through legislation. There would also be a new code of conduct for headhunters and a look at the conflicts of interest among remuneration consultants.
Opposition Labour business spokesman Chuka Umanna, whose Parliamentary question had obliged Cable to reveal the proposals earlier than planned, said the proposals didn’t go far enough.

The government, Cable said, was implementing 10 of the High Pay Commission’s 12 recommendations. Asked about the political controversy surrounding the bonus to Royal Bank of Scotland CEO Stephen Hester, Cable said: “That’s above my pay grade.”

Campaign group FairPensions said that while binding votes introduced “significant and welcome” pressure on shareholders to use their influence, on its own it wouldn’t challenge a culture of spiralling pay. “More searching questions need to be asked about how shareholders will use these new powers,” said CEO Catherine Howarth.

“Pay and especially bonuses need to be aligned to the long-term interests of shareholders,” said Sacha Sadan, director of corporate governance at funds giant Legal & General Investment Management. He wanted executives to own “a meaningful amount” of company shares.

And the Institute of Directors said that the binding vote on pay would “remind institutional investors of their key governance responsibilities”.