Home' Charter : 0811 Charter Aug Contents August 2011 I Charter 25
or more at two consecutive AGMs.
The new law is effectively a three-strikes
system as after two strikes, there is the
added requirement the company must put
forward a director re-election resolution at
the second AGM. This resolution must be
supported by a majority of the shareholders
in order to force a spill of the board.
Shareholders can then vote to remove the
directors at a subsequent meeting to be held
within 90 days of the second AGM.
This reform was designed to give
shareholders more say over executive pay
and boards will be particularly concerned to
avoid even the first strike. This means that
boards will want to be better informed on
those remuneration issues that will generate
shareholder concerns and potentially give
rise to a negative vote. Engagement with
shareholders and their representatives will
increase particularly when the company’s
remuneration arrangements change over
time as the board’s objectives change.
USE OF REMUNERATION
Potential conflicts of interest exist
where executives appoint remuneration
consultants to provide advice to boards
on their pay. The new law imposes a
requirement that it is for the board or the
remuneration committee to approve the
engagement of a remuneration consultant
and, significantly, the remuneration
consultant must provide its remuneration
recommendations to the non-executive
directors or the remuneration committee.
The remuneration consultant must
make a declaration to the Board that its
recommendations are free from undue
influence by executives.
In addition, details about the use of
remuneration consultants are to be disclosed
in the company’s remuneration report.
In this way, the government is effectively
telling boards to take ownership of the
remuneration setting process from beginning
to end, rather than simply reviewing and
approving the remuneration decisions.
PROHIBITION ON HEDGING
The new law will prohibit key executives and
their closely related parties from hedging their
unvested incentive remuneration. Previously,
it was possible for directors and executives
to hedge their exposure to incentive
remuneration. However, such practices were
considered to break the link to performance
and potentially encouraged executives to
take risks as they were protected on the
downside and only stood to reap from gains
on the upside.
ADAPTING TO THE
The debate and controversy that surrounds
executive remuneration means that it is
an area that will continually evolve and
the challenge for boards is to keep up
with the reforms and adjust the practices
and processes through which executive
remuneration is determined.
Boards must be quick to adapt and
respond to the constant shifts in the
executive remuneration regulatory landscape
and to do so in a way that satisfies the key
The reforms aim to shift the balance of
power away from management to the board
and shareholders. The new rules mean that
the board is now ultimately responsible for
determining executive remuneration and is to
essentially own the process. Boards must now
come up with remuneration structures that
strike the right balance between paying their
executives competitively, keeping shareholders
happy and responding appropriately to
regulatory shifts as well as public concerns.
In light of the new law, boards and
management need to review the remuneration
process, understand who is driving it and
determine the extent to which the process
needs to be changed to reflect the new
law. This should include establishing clear
protocols for the engagement of remuneration
consultants and delivery of their advice.
The new rules on improving shareholder
engagement and transparency of
remuneration arrangements will require
companies to take greater account of
shareholder views and concerns.
However, the advent of increased
regulation does not mean management is
removed from the remuneration process.
Management must continue to maintain
dialogue with the board and other
key stakeholders to ensure executive
remuneration arrangements are informed and
Martin Morrow FCA is the partner in charge of
KPMG’s executive remuneration practice and Bibi
Limnalong is a consultant in that practice.
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