January 31, 2012
The Business Secretary of the British government ("Government"), Vince Cable, announced a week ago a package of controversial plans in a bid to transform UK executive pay culture. Under a new-four-pronged approach, shareholders would for the first time be given a binding vote on executive pay packages. Executive boards may also need to become more diverse — including at least two individuals that had not previously been on a board of directors, and people from a broader range of professional backgrounds.
The Government is to finalize the detail of these plans over the coming weeks. Mr. Cable was careful to admit that "no proposal on its own is a magic bullet". There is however real concern that in the quest for the perfect alignment between pay and performance, the seemingly scatter gun approach taken by the coalition government has failed to hit the mark. This alert provides an overview of the proposals, and looks at some of the questions and concerns that they have raised.
The Government’s announcement follows a number of discussion papers, which explored executive pay, company performance, and a consultation on improving company reporting. Although the Government stopped short of implementing more radical changes, it has revealed its plans for a four–step package that would:
It remains to be seen how the Government’s four–prong package will be developed over the next couple of weeks. In the interim, the Business Secretary has confirmed that he will be asking the Financial Reporting Council to consult on amending the UK Corporate Governance Code to require all large public companies to adopt claw-back policies for executive remuneration. He has also confirmed that the High Pay Commission will be tasked with providing permanent on-going research and recommendations in relation to executive pay. Given the drastic nature of some of the High Pay Commission’s previous recommendations, it may prove difficult for the Government to find a magic bullet to current remuneration culture, whilst keeping in step with the need for companies to recruit and retain the best executives up for the job of providing effective risk management and strong leadership, inevitably creating shareholder value.
A link to the Government’s announcement can be found below:
 Amongst the many statistics coined, Government has said that the median total remuneration for FTSE 100 CEOs rose from an average of £1m to £4.2m for the period 2008-2010.
 Such as the High Pay Commission’s Final Report: ‘Cheques with Balances: Why Tackling High Pay is in the National Interest’, the ‘BIS Executive Remuneration Discussion Paper’, and the ‘BIS Future of Narrative Reporting: Consulting on a New Reporting Framework’.
 In particular, amongst other things, the High Pay Commission recommended that there should be employee representation on remuneration committees, whilst the BIS Executive Remuneration Paper considered whether shareholders should be on remuneration committees, as well as having binding votes on the previous years’ remuneration policy and packages.
 The Financial Reporting Council’s report ‘Developments in Corporate Governance 2011’ noted that despite the coming into force of the Stewardship Code, investor shareholder engagement is still low. Further, an analysis of the Remuneration Reports of the FTSE 350 companies for the period October 2010 to September 2011, reveal that just under 6% of shareholders voted against remuneration levels.
 Financial Times, 24 January 2012.
 If shareholders are deemed to be acting in concert, this could have adverse consequences under the UK Code on Takeovers and Mergers — in particular where the aggregate voting rights of the shareholders concerned exceed 30% (see Rule 9 of the UK Code on Takeovers and Mergers and the rules on mandatory bids).
 Amongst other things, the Government is also to consider mechanisms to limit conflicts of interest arising as a result of remuneration committee members sitting on boards of other companies. It has not provided much insight into how it plans to do this. The recently announced proposals are in addition to the specific gender diversity initiatives in UK boardrooms which gained traction in 2011. In particular, various changes were introduced to the UK Corporate Governance Code following the Davies Report (http://www.bis.gov.uk/assets/biscore/business-law/docs/w/11-745-women-on-boards.pdf) and Lord Davies’ call to FTSE 100 companies to aim for 25% female representation by 2015 and for one third of all new appointees to FTSE 100 and FTSE 250 companies to be women.
 Principal B.1 of the UK Corporate Governance Code requires board members to have appropriate skills and experience to enable them to discharge their respective duties and responsibilities.
 The plans are also to require greater transparency regarding the process for the appointment of remuneration consultants, how they are appointed, whom they report to, and whom they advise.
 Financial Times, 24 January 2012.
 It was argued in response to the BIS Executive Remuneration Paper, that in addition to the cost of putting in place voting/election procedures, there would also be costs involved in effectively training and providing awareness to employees on business issues/strategy so that employees could make an informed decision.
 UK Prime Minister David Cameron pledged this month to tackle the high levels of pay which made "peoples blood boil".
 Currently, the Remuneration Code only requires financial institutions to have claw-backs in relation to executive remuneration — it is questionable whether this type of mechanism is only suited to more ‘high’ risk businesses.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you work, or any of the following lawyers in the firm’s London office:
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