The rebellion of BT’s small shareholders at its agm in July, and the fall-out from the collapse of the Marconi share price, have once more threatened to undo the progress made over the last decade by Cadbury, Greenbury and Hampel in increasing the level of transparency and accountability in the relationship between directors and shareholders.
Research has found that directors of FTSE-100 companies received average pay rises of more than 28% last year (more than five times the increase in the UK’s average wage) despite the 10% fall of the stock market during 2000. Even after the effect of bonus schemes and long-term incentive plans was taken away, the average rise in base salaries was 22%.
The Government was always going to be on safe ground in announcing its intention to require listed companies to prepare remuneration reports and put them to shareholder votes.
The shareholder vote will be advisory only and will not overrule any director’s contractual entitlements. But faced with having to explain away the discrepancy between a falling share price and enormous bonus payments, boards will be obliged in future to think very carefully about the full implications of their decisions on pay.
This new development was inevitable. The company law review’s final report recommends that directors should be subject to a duty to act in a way that preserves the company’s ‘business reputation’. Shareholders should, in future, be allowed to take legal action against directors – in the name of their company – should directors fail to comply with their duties.
The introduction of mandatory works councils under a forthcoming EU directive will further increase the potential for scrutiny and criticism of boardroom pay.
Arguably, though, the biggest impact of the DTI move will be the shot in the arm it will give to the agm. The company law review has already proposed that company agms should be allowed to take place on a ‘virtual’ – ie multi-location – basis, and this will almost certainly be acted upon by the Government.
Giving more shareholders the opportunity to participate in agms is one thing, presenting them with the incentive to do so is another. The prospect of being asked critically to review, and to vote on, boardroom pay policy is exactly what they have been waiting for.
- John Davies is head of business law at ACCA
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