On 3 June 2003, the Secretary of State for Trade and Industry, Patricia Hewitt announced a new consultation exercise entitled "Rewards for Failure" which seeks to address shareholder concerns over directors’ compensation and "golden parachute" issues which have been the subject of recent press interest.
What measures is the Government seeking to discuss?
The Government is seeking views on possible amendments to best practice guidance as discussed in the recent ABI and NAPF Joint Statement on Best Practice on Executive Contracts and Severance. Key proposals include:
- Reducing contract and notice periods.
- The use of "liquidated damages" clauses, whereby the amount of compensation payable to a director on termination is agreed at the beginning of the contract.
- Phased compensation payments which will cease to be payable once the outgoing director commences new employment.
The Government is also considering legislation that would:
- Require compensation payments to be fair and reasonable with regards to the director’s performance.
- Reduce the statutory maximum period of directors’ contracts under the Companies Act from 5 years to one year (with the option to contract for three years on first appointment).
- Closing what they say is a loophole in the Companies Act by subjecting "rolling contracts" to the revised statutory maximum.
What is the timescale?
Responses to the proposals are required by 30th September 2003. Following this the Government can either:-
- Allow more time for existing measures to take effect - for example, the ABI/NAPF Joint Statement and the Directors Remuneration Report Regulations 2002 (see below).
- Seek to reinforce the best practice guidance currently available.
- Seek to introduce appropriate legislation.
Two other consultations have been carried out by the DTI on directors' remuneration over the past four years.
The first (announced by Stephen Byers on 30 July 1999) considered boardroom pay and made a number of recommendations aimed at improving transparency and accountability in the area of directors’ remuneration.
The second (announced by Patricia Hewett on 19 October 2001) lead to the Directors’ Remuneration Report Regulations 2002, which require all quoted companies with financial years ending on or after 31 December 2002 to include an official report on directors’ remuneration in their annual accounts. The report must include details of compensation payable to directors upon the termination of their contracts.
The impact of this greater transparency has already been seen with increasing media interest in the compensation payments paid to directors leaving what are considered to be struggling companies.
This further consultation exercise clearly indicates the Government's desire to address concerns over directors' remuneration and their willingness to consider legislative reform, if necessary.
Whilst the Government's review is currently in its infancy, we anticipate some form of best practice guidance, or potentially new legislation, will be introduced and that companies will need, as a result, to review their arrangements for remunerating directors.
It is clear to see which way the wind is blowing - as also illustrated by the shareholders' recent revolt at GlaxoSmithKline over directors' remuneration.