CC BY
19Khudaibergenova Damilya Shirinkhanovna,
Research fellow of the Department of International Legislation and Comparative Law of the Institute of Legislation of the Republic of Kazakhstan, LLM
EXAMINATION OF THE LEGAL AND GOVERNANCE RESTRAINTS ON EXCESSIVE EXECUTIVE DIRECTORS' REMUNERATION
IN THE GREAT BRITAIN
Financial crisis occurred in recent years, exposed problems and weaknesses of companies' governance, and especially improper distribution of funds. There is an opinion that the way executive pay is managed has contributed to the financial crisis in Europe, as well as in United States. Nowadays banks and financial institutions taking government bailout money are demanded to make restraints on bonuses, however others have done so of their own free will. In such situation legal regulation is quite important. First of all, executive compensation should be equitable. This problem is strongly discussed today; there is a question whether executive remuneration equitable or excessive. There are some interesting situations, when companies consider excessive remuneration can be justified:
• A company considers its director to be a high professionals, so they would be readily paid a compensation more than other companies do;
• Head-hunter guaranteed that company's new director worth 30 (any quantity may be used) per cents more than others, so again company is ready to pay much more to their director;
• There is an apprehension that company can lose its director due to the competition, if he would not be paid bigger compensation etc.
Bob Tricker gives comments on all of these statements and explains why these people are wrong in their consideration. However, it is quite difficult to decide whether executive compensation equitable or excessive, and maybe even impossible. Anyway it is important to control the payment of executive compensation by all available legal and governance means. But it is not so easy to do as it seems, because high level of executive compensations are justified when directors' management of the company brings a company to an outstanding performance. However, at the same time the level of remuneration should not be too high as it can lead to increase of company's
costs and decrease company's competitiveness. Executives' remuneration sometimes justified in compare with the compensations of sports, music and movie stars; also investment bankers, successful attorneys and others. However, it is still arguable point of view.
Directors are not allowed to pay excessive remuneration to themselves. Controlling executives' own compensations is preconceived to the material incentive of other employees. In Re Cumana court decided that remuneration was excessive. In Smith v Croft directors paid remuneration themselves, too. However, remuneration was not considered as excessive, judge notified that in such area like entertainment business, such level of remuneration is justified. Following this decision we can consider that every area of business can be justified in that way. Therefore some general restrictions on remuneration amount in money equivalent or percentage of company's performance are needed to be accepted, so that these rules could be equal for all companies without a distinction on their business area. Today disputes about setting standards of executive pay become more frequent. The G-20 leaders declared that they are committed to "implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking", such attention to this problem discussed at the international level shows a real importance of solving this question.
There are some cases related to excessive remuneration payments. In the case of Saul D Harrison & Sons plc part of the directors' salaries were paid to their wives. Accounts for directors' compensation turned out to be imprudent and excessive in Fisher v Cadman. These emoluments had not been approved in general meeting by the company the way it was required. Similar situation occurred in the Irvine v Irvine case. Respondent
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have been accused in paying himself excessive and unreasonable level of compensation, he also failed to comply with the requirement to approve company's annual accounts by the board of directors under provisions of the 1985 Act.
Disclosure obligation is one of the most important forms of excessive payments control. The United Kingdom law requires thorough disclosure on directors' remunerations and its relation to performance of the company. Regulations have been made under Companies Act 2006 (CA 2006), s 420, require preparing directors' remuneration report for each financial year of the company. It should be noted that these obligations are imposed on all directors, not just the remuneration committee. Under this section an offence is committed in case of failure to comply with the directors' remuneration report requirements. A person guilty of an offence is liable on conviction on indictment, to a fine; on summary conviction, to a fine not exceeding the statutory maximum.
The directors' remuneration report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company. If a directors' remuneration report is approved that does not comply with the requirements of CA 2006, every director of the company who, knew that it did not comply, failed to take reasonable steps to secure compliance with those requirements commits an offence.
All publicly listed companies have to comply with an extra regulation called the «Listing Rules» (LR). These rules set by the Stock Exchange in 2005, but administered by the Financial Services Authority (FSA) now. Listing Rules as well as Companies Act provide regulations on directors' remuneration reports. The report to the board required by LR 9.8.6 R(7) must contain a statement of the listed company's policy on executive directors' remuneration. This information has to be provided in a tabular form with explanatory notes and must contain the following:
• The amount of basic salary and fees, the estimated money value of benefits in kind, annual bonuses, deferred bonuses of each director for the period under review;
• The total remuneration for each director for the period under review and for the corresponding prior period;
• Any significant payments made to former directors;
• Any share options for each director, by name, in accordance with the requirements of the Directors' remuneration Report Regulations;
• Details on any entitlements or awards granted and commitments made to each director;
• An explanation and justification of any element of director's compensation, other than basic salary, which is pensionable.
Separate compensation report has to be provided annually by quoted 'companies' under the norms of The Directors' Remuneration Report Regulations 2002 (DRRR). The directors' remuneration report shall contain a statement of the company's policy on directors' remuneration for the following financial year and for financial years subsequent to that.
In the 21st century the use of good corporate governance became recognized in many countries. Development of corporate governance had led to development of corporate governance instruments, such as codes of best practice. The UK Financial Services Authority (FSA) issued The Combined Code on Corporate Governance (Combined Code), the last edition of it was issued on June, 2008. There are also best practise guidelines on voting, corporate governance policy, statements, responses and others. Guidelines edited by some institutional shareholder organisations, such as Pensions Investments Research Consultants (PIRC), Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF).
Combined Code provides principles on the level and make-up of remuneration and procedure. The code is a guide to the good board practice principles based on corporate governance practices, but not an exact set of regulations. However, listed companies should follow provisions stated in Combined Code. Companies are expected to comply with Combined Code regulations, otherwise they can be fined under Listing Rules' norms. Due to "comply or explain" principle its breach leads to violation of Listing Rules. Agreement acceptable for both, company boards and shareholders, for ensuring this principle remain an efficient alternate to a framework based on rules, is a key point of the healthy corporate governance regime in the United Kingdom. It is also should be stated that there is no distinction between large and small companies stated in Combined Code, but small companies are enabled to adopt an appropriate norms under provisions of Combined Code, if they consider that some of the Code's regulations inadequate and not suitable for them.
The board should establish a remuneration committee of at least three (two in smaller companies) independent non-executive directors. The remuneration committee should have delegated responsibility for setting remuneration for all executive directors and the chairman, including
pension rights and any compensation payments. According to Bebchuk there are three causes that led to rising usage of the compensation committees consisting of independent directors in the United States. First, investor advocacy organizations insisted on creating such governance bodies in companies. Second, companies established compensation committees are strongly motivated by the provisions the tax code creates. Third, if a company encounters with a legal challenge, presence of the compensation committee in its structure would cause more respectful examination of remuneration plan.
The level of remuneration received by senior executives already factors in the risk associated with their role. Boards should ensure that contracts do not include any additional financial protection in the event of poor performance leading to termination. Directors' contracts should guarantee that severance pays resulted by low performance of the company should not extend beyond basic salary. The components of severance payments should be fully disclosed in directors' remuneration report. The remuneration committee should carefully consider what the compensation commitments' consequences are in a case of early termination. The remuneration committee should also consult the chairman and/or chief executive (CEO) about their proposals relating to the remuneration of other executive directors.
Let us consider key points that Combined Codes provide on executive remuneration itself.
• Levels of remuneration should be sufficient to attract, retain and motivate directors of the equality required to run the company successfully, but a company should avoid paying more than it is necessary for this purpose.
• A significant proportion of executive directors' remuneration should be structured to link rewards to corporate and individual performance.
• The performance-related elements of remuneration should form a significant proportion of the total remuneration package of executive directors and should be designed to align their interests with those of shareholders and to give these directors keen incentives to perform at the highest levels.
• Executive share options should not be offered at a discount save as permitted by the relevant provisions of the Listing Rules.
• Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.
• There should be a formal and transparent procedure for developing policy on executive remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.
According to the Schedule A of the Combined Code performance conditions have to be relevant, and if remuneration committee consider that directors are not eligible for annual bonuses, they can be terminated. Also the remuneration committee should consider whether the directors should be eligible for benefits under long-term incentive schemes. And any new long-term incentive schemes should be approved by shareholders and should preferably replace any existing share option schemes, however the total rewards potentially available should not be excessive.
It should be stated that only basic salary can be pensionable, the remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and any other changes in pensionable remuneration, especially for directors close to retirement. Remuneration report should be signed by the Remuneration Committee chairman, however companies can choose to apply a different approach. For instance, "as the Report covers non-executive directors' remuneration, having the Company Secretary sign avoids the Remuneration Committee chairman signing a Report which covers his own remuneration".
There is an opinion that excessive executive remuneration shows that largest corporations "dysfunctional" in some way. It is considered that the board of directors put interest of executives above those of shareholders by paying them huge compensations in breach of the board's fiduciary obligations. Therefore designing a remuneration package should be very thorough in order to protect interests of shareholders as the main idea of corporation.
Shareholders have a couple of ways for challenging executive remuneration plans, though these mechanisms cannot assign much restraint on executive pay. The first one is a derivative litigation, when shareholders may use the courts in order to reject remuneration packages that do not increase shareholder value to maximum, nevertheless shareholders cannot sue the board of directors in cases concerned with executive compensation. It happens because excessive pay does not do any harm for shareholders directly, but does indirectly via equity interest of shareholders in the company, in that case shareholders should generate a derivative
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suit. Shareholders have to prove that the board had perpetrated the duty of loyalty, duty of care. The second approach is a voting on option plans, when shareholders may try to form executive pay while voting on stock option plans.
It is known that the legal regulation of excessive remuneration is quite important. First of all, executive compensation should be equitable. This problem is strongly discussed today; there is a question - executive remuneration equitable or excessive. It is not even possible clearly define whether executive pay excessive or not, where is that border when excessive compensation has been paid. Therefore there is a necessity to set frames for the executive pay, which would be mandatory for all companies.
The main focus in contemporary remuneration governance is reducing excessive and inequitable remuneration packages. Corporate scandals and following company collapses have led to disclosure of executives' compensations, which turned out mostly to be excessive. Executives' compensations are strongly discussed in media, by politicians and ordinary people. There are concerns about how can they earn so much money? The answer to this question is in two key elements of remuneration packages - stock options and restricted stock grants.
Disclosure obligations of the directors' pay are now stated in both legislative and corporate governance acts. In 1995 the Greenbury report recommended to establish remuneration committees consisted of independent non-executive directors, who would annually report to shareholders full disclosure of the pay of each director; and acceptance of the directors' reward linked with the company's performance. Nowadays there are remuneration committees operating in companies, but the issue whether directors' compensation is performance linked or not is still unsolved. Directors can be motivated by market-based measures, accounts-based measures, and individual director performance measures in order to improve company performance.
Bogus states that reforms on corporate governance appeared to be generally successful, compensation committees have been established in most of public companies. However, these reforms have not an appropriate effect. The main point is that independent directors usually are not independent, because they are under obligation to management for getting their job; in fact, CEO controls the nomination of directors. Still the issue on controlling executive pay have been continuing even nowadays.
Bibliography
1. Simon Evans, Carly McIver (2009), Credit Crunched. Executive pay across Europe, Cross-border Quarterly.
2. Bob Tricker (2008), Corporate Governance. Principles, Policies, and Practices, New York, Oxford University Press.
3. Donald Nichols, Chandra Subramaniam (2001), Executive Compensation: Excessive or Equitable? Journal of Business Ethics, Vol. 29.
4. Report of a Study Group chaired by Sir Richard Greenbury (1995), Directors' Remuneration, para 6.6, available at http://www.ecgi.org/codes/documents/greenbury.pdf
5. Graef S. Crystal (1992), In Search of Excess. The Overcompensation of American Executives, New York, W. W. Norton & Company Inc.
6. S. H. Goo, Minority Shareholders' Protection (1994), Cavendish Publishing Limited.
7. Re Cumana Ltd [1986] BCLC 430
8. Smith v Croft [1986] WLR 580
9. Lucian A. Bebchuk, Fixing Bankers' Pay, The Economists' Voice. Special Issue on Financial Market Regulatory Reform, November 2009, available at http://www.bepress.com/ev/vol6/iss11/art7/
10. Re Saul D Harrison & Sons plc [1995]1 BCLC 14
11. Fisher v Cadman [2006] 1 BCLC 499
12. Fisher v Cadman [2006] 1 BCLC 499
13. Irvine v Irvine (no 1) [2007] 1 BCLC 349
14. Guido Ferrarini, Niamh Moloney, Executive Remuneration in the EU: The Context for Reform (2005), European Corporate Governance Institute, Law Working Paper N°. 32/2005, Available at SSRN: http://ssrn.com/abstract=715862
15. Freshfields Bruckhaus Deringer (2007), Directors' Remuneration Report Regulations.
Checklist, Commentary and related Best Practice, available at http://www.freshfields.com/publications/ pdfs/2007/17802.pdf
16. Companies Act 2006
17. The Financial Cervices Authority, Listing Rules Instrument 2005
18. The Auditing Practices Board (2002). The United Kingdom Directors' remuneration Report Regulations. Bulletin 2002/2, available at http://nt8.zacks.com/zackscharts/download/UK_Directors_ Remuneration_Report_Update.pdf
19. The Directors' Remuneration Report Regulations (2002), available at http://www.opsi.gov.uk/SI/ si2002/20021986.htm
20. The Combined Code on Corporate Governance 2008
21. NAPF, Joint Statement on Executive Contracts and Severance by the Association of British Insurers and the National Association of Pension Funds (2008), s 2.4 available at
http://www.napf.co.uk/DocumentArchive/Policy/Corporate%20Governance/20080218_ABI%20 NAPF%20Statement-feb%202008.pdf
22. Freshfields Bruckhaus Deringer, Directors' Remuneration Report Regulations. Checklist, Commentary and related Best Practice (2007), available at http://www.freshfields.com/publications/ pdfs/2007/17802.pdf
23. Carl T. Bogus (1993), Excessive Executive Compensation and the Failure of Corporate Democracy, Buffalo Law Review 41, winter 1993
24. FRC, The Combined Code and associated guidance, Available at http://www.frc.org.uk/corporate/ combinedcode.cfm
25. Report of a Study Group chaired by Sir Richard Greenbury (1995)
Бул мацалада атцарушы директорларыныц сыйацыларды цуцыцтыц жэне корпоративтгк шектеулердщ царым-цатынасы царастырылады. Сонымен цатар, сыйацынъщ жэне бгркелктктгц артыгыныц сурацтары царастырылады.
Ty^h свздер: сыйацы, цуцыцтыц шектеулер, корпоративтж шектеулер.
В данной статье рассматриваются правовые ограничения на вознаграждения исполнительных директоров и их взаимосвязь с корпоративными ограничениями. Кроме того, рассматриваются вопросы избыточности вознаграждения и их равномерности.
Ключевые слова: вознаграждение, правовые ограничения, корпоративные ограничения.
This article examines the legal restraints on executive directors' remuneration and their interrelation with the governance restraints. Moreover the issues of remuneration's excessiveness and equitability are considered.
Keywords: remuneration, legal restraints, corporate restraints.
Дэмелi Шырынханкызы ^дайбергенова,
КР Зац шыгару институты хальщаральщ зацнама жэне салыстырмалы ^¥^ыщтану бeлiмшщ гылыми ^ызметкер^ магис^
¥лыбритания елшдеп аткарушы директорлардыц асыра сыйакыларына к;¥Кык;тык; жэне корпоративен: шектеулердi карастыру
Худайбергенова Дамиля Ширинхановна,
научный сотрудник отдела международного законодательства и сравнительного правоведения Института законодательства РК, магистр права
Рассмотрение правовых и корпоративных ограничений на чрезмерные вознаграждения исполнительных директоров в Великобритании
№ 2 (34) 2014 ... K,a3aKpmaH PecnyönuKacbi itui rnuzapy uticmumymMtiMii .icapiubicbi Khudaibergenova Damilya Shirinkhanovna,
Research fellow of the Department of International Legislation and Comparative Law of the Institute of Legislation of the Republic of Kazakhstan, LLM
Examination of the Legal and Governance Restraints on Excessive Executive Directors' Remuneration in the Great Britain
Институт законодательства Республики Казахстан представляет
КЕДЕН ОДАГЫ МЕН Б1РЫ^АЙ ЭКОНОМИКА-ЛЫК КЕЩСТ1ККЕ МYШЕ МЕМЛЕКЕТТЕРДЩ ЗАЦНАМАСЫН YЙЛЕСТIРУ: Децгелек Yстел мат-ры, 2013 ж^1лгы 7 параша. = ГАРМОНИЗАЦИЯ ЗАКОНОДАТЕЛЬСТВА ГОСУДАРСТВ-ЧЛЕНОВ ТАМОЖЕННОГО СОЮЗА И ЕДИНОГО ЭКОНОМИЧЕСКОГО ПРОСТРАНСТВА - Астана: «Казахстан Республикасыныц Зац шыгару институты» ММ, 2014. - 136 б. ^аза^ша-орысша.
Жина^ 2013 ж^1лгы 7 ^арашада Казахстан Республикасыныц Эдiлет министрлт Зац шыгару ин-ститутымен ЕурАзЭС мYше мемлекеттердiц эдiлет министрлерi кецесшщ 22 мэжiлiсi шецберiнде «Кеден одагына жэне БiрыцFай экономикалыщ кецiстiкке мYше мемлекеттердiц зацнамасын Yйлестiру» та^ырыбында етюзшген децгелек Yстел ^орытындылары бойынша эзiрлендi.
Жина^ ЕурАзЭС мYше мемлекеттер сарапшыларыныц интеграциялыщ бiрлестiктерге мYше мемлекеттердiц зацнамасын Yйлестiру саласындаFы теориялыщ жэне практикальщ тэжiрибеге, БЭК шецберiнде бiрiгудiц езектi мэселелерi, сондай-а^ Еуразиялыщ экономикалыщ одаFыныц
келешекте ^алыптасуыныц халы^аралы^-к¥^ы^ты^ мэселелерше ^атысты ма^алалардан тирады.
Сборник сформирован по итогам проведенного 07 ноября 2013 года Министерством юстиции Республики Казахстан совместно с Институтом законодательства Республики Казахстан в рамках 22-го заседания Совета министров юстиции государств-членов ЕврАзЭС круглого стола на тему: «Гармонизация законодательства государств-членов Таможенного союза и Единого экономического пространства».
Сборник содержит статьи теоретического и практического опыта экспертов государств-членов ЕврАзЭС в области гармонизации законодательства государств-членов интеграционных объединений, актуальных вопросов правовой интеграции в рамках ЕЭП, а также международно-правовых проблем формирования будущего Евразийского экономического союза.
