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What Happens in Europe ...
06/28/2012 - FTI Consulting, Strategic Communications
A development that occurred in Britain last week bears watching here in the United States.
Vince Cable, the Business Secretary of Mr Cameron’s cabinet, presented to Parliament measures that would allow shareholders of companies listed in the UK to cast binding votes on executive remuneration. This came in response to shareholder dissatisfaction at pay packages for executives whose companies have underperformed.
Under the rule, companies would have to gain majority support from their shareholders at least every three years, and any payments must be within the approved scope. If companies wish to change pay policy they must submit the new policy to shareholders for re-approval. There will still be an annual advisory vote on how pay policy was implemented in the previous year, including sums paid to directors. At the same time, companies must also disclose a single figure for of total pay for executives in an effort to make complicated pay schemes easier to understand and more comparable. Finally, shareholders must approve “exit” payments for departing executives.
Mr Cable refused to back more radical recommendations from the High Par Commission that were supported by Labour, such as annual votes and representation by workers on compensation committees.
The rules are expected to be approved by Parliament and then become law in October 2013.
Many corporate governance developments occur in Europe and then are exported to the US, much the way say-on-pay was implemented there before it became law in the US. Given the angry shareholder sentiment that exists in the US, it is likely only a matter of time before the same regulations are enacted here.
In reality, though, if a binding shareholder vote on compensation were to be adopted in the US, the direct impact would be felt by only a small minority of companies. In the 2012 proxy season so far, the average shareholder support for compensation has been almost 90%, and only a handful of companies have failed to receive a majority of votes in favor of their comp plans.
Nevertheless, companies should not derive any comfort from this. FTI research shows that investors think companies have issues with their comp plans if their shareholder support falls below 80%, so even if a comp plan is “approved” by a majority of the votes cast, the company still could face challenges if it does not get support well above a majority. And while the US shareholder vote on compensation is non-binding, there are a number of mechanisms (director withhold votes, for example) by which shareholders can register their dissatisfaction and influence the affairs of the corporation.
This underscores the continued need for companies to engage with their shareholders to informally learn of concerns before they come to a public referendum.