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Directors' pay and financial reporting standards: shareholder voting guidelines get tough

Tom Martin


United Kingdom

On 14 February 2013, Pensions Investment Research Consultants ("PIRC") published the 17th edition of its UK Shareholder Voting Guidelines.

Market reCap June 2013 edition


A year on from the "shareholder spring" of 2012, advisory bodies are now urging shareholders to exercise their voting rights to combat some of the issues which are now widely regarded as having contributed to the financial crisis of 2008.

Revised PIRC voting guidelines

On 14 February 2013, Pensions Investment Research Consultants ("PIRC") published the 17th edition of its UK Shareholder Voting Guidelines. PIRC, a leading independent research and advisory consultancy on corporate governance issues, has decided to refocus the emphasis of its guidelines on the management of shareholders' capital and a tougher approach on remuneration issues in what it describes as a "significant shift" of its approach. PIRC singles out two particular targets for shareholders to oppose: long-term incentive plans ("LTIPs") and international financial reporting standards ("IFRS").

PIRC advises shareholders to oppose all new LTIPs, saying they are "fundamentally flawed", "are not long term" and "do not incentivise", being subject to the manipulation of remuneration committees. It also believes that non-financial performance indicators in pay schemes should only be invoked if financial performance is satisfactory, and that no performance targets should represent responsibilities that should be part of a director's expected role. It opposes quartile-based benchmarking when used as a justification for raising pay, and the rewarding of directors following a capital raising.

Remuneration consultancy is also in PIRC's sights: it will not support any directors' remuneration reports, the approval of the annual report and accounts, the re-appointment of the auditors or the re-election of the chairs of the remuneration and audit committees if the company's audit firm is also its remuneration adviser.

PIRC has for some time expressed a critical view of company financial and accounting disclosures under the IFRS framework, saying that IFRS has been delivering profits which fail to give a true and fair view and that such "distorted" profits have been used to justify inappropriate remuneration. It has now taken this stance further by recommending opposition to the adoption of a company’s report and accounts and audit committee members where it is clear that the company’s adherence to IFRS has led to a failure of the accounts to provide the true and fair view.

Trade union voting policies

In another sign of increasing organisation of shareholder action against perceived problems, on 26 March 2013 the TUC and its two largest affiliated unions, Unite and UNISON, launched Trade Union Share Owners - a new group which states its aim as putting union values into the way in which their investments are voted on at company AGMs.

The initiative, borne out of a frustration that the views of ordinary union members were not being heard in the boardrooms of the companies in which their pensions were invested, will see a new direction given to the management of £1 billion of shareholdings. The TUC expresses the hope that more of its affiliated unions will get involved.

As well as highlighting concerns over board structure, equal opportunities, risk, financial reporting and shareholder engagement, the Trade Union Voting and Engagement Guidelines devote a section to directors' remuneration, with the following stated aims:

  • the ratio between a director's total remuneration and the median employee pay should not exceed 20:1 for more than half of the directors at a company;
  • increases in directors' total pay should be in line with ordinary employees' pay increases;
  • companies should adopt the living wage and remuneration reports should state whether the company is an accredited living wage employer;
  • directors should not participate in more than one performance-related incentive scheme and the maximum award under it should not exceed 10% of salary;
  • directors' notice periods should be no longer than those of the employees; and
  • executive directors should be members of the same pension schemes and on the same terms as staff. 

Useful links:

  • The PIRC guidelines can be ordered from here
  • The Trade Union Voting and Engagement Guidelines can be found here  

Tom Martin is a Senior Associate in the Corporate Group of Field Fisher Waterhouse LLP in London.

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