By Holly Sheffield and Sylvie Watts
Last week the press reported that several US listed companies will be introducing self-regulating measures on executive pay. Generally, several companies are allowing their shareholders to have a non-binding vote on executive remuneration matters. Is this an all change to the style of US corporate governance?
Significantly, this introduction is not driven by legislation or federal agency rules. Instead, companies are offering up a self-regulating tool: a non-binding vote on remuneration packages as disclosed in the annual filing, similar to the one that shareholders of UK listed companies can take advantage of.
There have been several indicators of movement in this area. Recently, President Bush made a speech to Wall Street and urged companies to curb "run-a-way" pay. In 2006, the SEC announced new disclosure rules on executive pay – the first change to pay disclosure rules since 1992. A bill in the legislature may curb executive pay by limiting the corporate deduction for deferred compensation to $1 million and now, on the heels of shareholder outcries caused by significant pay-outs from underperforming companies, a handful of companies are showing a willingness to change by extending to shareholders an advisory vote.
The shareholders of UK listed companies vote annually on director pay as disclosed in the required annual filing. This is statutory rather than self imposed. In the UK, there is law determining the scope of the required annual disclosure on executive pay, but existing fluidly on top of that are best practice codes, written by bodies that are analogous to Institutional Shareholder Services (ISS). Because of the ability to vote, even though non-binding, the best practice codes are seriously considered. Although the vote is non-binding, the potential for negative press coverage is considered a serious deterrent.
Given the changing governance scene in the U.S., American companies may want to investigate the UK style of governance. Because this area is heavily influenced by our best practice and governance codes, you may find a general understanding of the UK rules informative. It is also worth noting that the environment in which UK listed companies operate when it comes to executive director pay has not been wholly negative.
For instance, overall, the activity has fostered an environment where communication between the large shareholders, and compensation committees, before reporting season is important. Such communication can also assist in the creation of a healthy environment of trust between companies and their owners. Breakdowns in good governance certainly exist in the UK market, but there has been a decrease in companies being warned over material anti-best practice measures on executive pay over the past few years. We have been finding that companies are using the disclosure forum to their advantage, highlighting what areas the executive team is focusing on and perhaps providing comfort to investors about certain areas. For example, beginning this year, governance groups are asking boards to link "Environmental, Social and Governance" priorities of the company with performance related pay.
We do not think the U.S. securities markets are going to imitate exactly the UK style of corporate governance tomorrow, but our incentives and corporate governance practice group have experience in advising on executive pay and governance concerns, from benchmarking reports on executive pay, to looking at how performance targets can be applied and analysing the independence of directors. Should you think this experience could benefit you, please do contact us to discuss any of these issues.
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