UK Investor Group Advises on Executive Compensation and Board Performance

The Association of British Insurers (ABI) has released a couple of interesting reports that you might find useful, perhaps sharing with your general counsel and others:

You can read an ISS summary and the ABI press release for a high-level view.

The Report on Board Effectiveness talks about three areas: diversity of board members, succession planning, and board evaluation. The more interesting (to me) recommendations were:

  • “Companies should provide clear statements on the steps they are taking to achieve diversity in their boardroom and should openly discuss the issues and challenges that they face in their Annual Reports”. While I understand the passion for some to increase diversity, this tends to be focused on adding female directors rather than adding people with key skills and experiences not held by current board members.
  • “Chairmen should widen the search for non-executive directors, broadening traditional talent pools, when making board appointment”. I wholeheartedly support this (not without self-interest).
  • “Companies should explain the methodology used in their board evaluations in line with the recommendations of the UK Corporate Governance Code.
  • “Companies should report more openly on the key outcomes of their evaluations and the steps they intend to take to address the issues that have been highlighted. We expect the outcomes of these evaluations will be different year on year as the board evolve.”
  • “External evaluations should be carried out by an independent party who is not subject to conflicts of interest. This should preclude those who provide other services, such as search agents who assist in the recruitment of directors and remuneration consultants”. As noted in the report, the UK Code recommends annual board evaluations and an external review at least every third year.

The ABI Principles of Remuneration includes some actions that I fear may be more than most companies and boards are prepared to take. (I have highlighted some sections.)

  • “Salary decisions should not be taken purely on the basis of simple benchmarking against peer companies. If benchmarking is used, the aim should not solely be to match the “median” but to provide a point of reference for determining the appropriate salary for the specific job. The constant chasing of a perceived median has been a major contributor to the spiralling levels of pay.
  • “The pension provision for the executives should where possible be in line with the general approach to the employees as a whole.
  • “Annual bonuses should exist to reward contribution to the business during the year above the level expected for being in receipt of a salary. They should be clearly linked to business targets, ideally through the KPIs reported in the Enhanced Business Review. Where other measures are chosen these should be explained and justified. The KPIs can be both financial and non-financial. The measurements chosen should be quantifiable and the targets chosen should be set at the start of the year. The performance measures and targets should be publicly disclosed. If the targets are considered to be commercially sensitive they should be disclosed retrospectively. Shareholders discourage the payment of annual bonuses to executive directors if the business has suffered an exceptional negative event, even if some specific targets have been met. In such circumstances shareholders should be consulted on bonus policy and any proposed payments should be carefully explained.”
  • Following payment of the bonus, shareholders will expect to see a full analysis in the Remuneration Report of the extent to which the relevant targets were actually met.
  • “Remuneration Committees should satisfy themselves that when using in isolation either comparative or absolute performance metrics the result does not produce outcomes that are not in line with the overall performance of the company, its future prospects or the experience of its shareholders over the performance period.
  • It is unacceptable that poor performance by senior executives, which detracts from the value of an enterprise and threatens the livelihood of employees, can result in excessive payments to departing directors. Payment for failure cannot be tolerated. Boards have a responsibility to ensure that this cannot occur both when negotiating new contracts and when agreeing any payments when contracts are terminated.”
  • “Shareholders consider it inappropriate for chairmen and independent directors to receive incentive awards geared to the share price or corporate performance that would impair their ability to provide impartial oversight and advice.”
  • The inclusion of clawback and malus provisions in scheme designs and executive contracts is a recognised way to prevent executives receiving rewards that are undeserved. Shareholders expect to see such provisions included in relevant arrangements and for them to be enforced when appropriate.”

How do your boards compare to these recommended practices? Do you like them?


Posted on Oct 10, 2011 by Norman Marks

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