The Corporate Governance Intelligence Council Blog

UK Government’s Tough New Rules on CEO Pay

With executive compensation continually in the headlines and with Say on Pay seemingly having minimal impact on tempering executive pay packages, regulators in the UK are looking at new measures to limit the amount a public company C-suite executive can get paid.

A raft of wide-ranging measures had been proposed by the government back in June, including providing shareholders with a binding say-on-pay vote. The rules are greatly watered down from the initial proposal but still contain several measures that will make life challenging for senior executive teams.

The UK government has announced measures to rein in executive pay. Some of the plans discussed previously have been dropped – as various sources recently predicted – but others have been confirmed as going ahead.

Perhaps the two most controversial measures are the CEO pay ratio and the “Name and Shame” list. The pay ratio legislation will look very similar to that proposed in the US and will require public companies to disclose the difference between CEO compensation and that of the “average” employee. Secondly, the Investment Association (IA) will be responsible for monitoring all annual meetings in the UK and publicly naming all companies that receive 80% or less on a say-on-pay vote. Presently, many companies manage to fly under the radar with respect to significant resistance to pay practices and low results typically are not heavily marketed. This could change if IA starts using mainstream media to publicize all companies that fall below the 80% threshold, thus further shining a light on pay at those companies.

Only time will tell if the new measures result in reductions in CEO pay, but one thing is certain – the reforms will shine an even brighter spotlight on executive compensation and intensify debate over appropriate pay levels and paying for performance.

 

Engagement and Activism Expected to Increase for 2018

Rivel’s Brendan Sheehan joined thought leaders from KPMG and Jenner & Block to share insights and predictions regarding where corporate governance is headed for 2018 and beyond. Below is a short video of our discussions on CSR and environmental risk proposals.

Perspectives on Proxy Advisors

The latest CGIC study among institutional investors and proxy voters has been released to CGIC members. This report focuses on perspectives of proxy advisory firms, such as ISS and Glass Lewis.

Overall, investors are happy with the job these rating agencies are doing, with only 17% citing a concern over their standardized, one-size-fits-all approach.

Proxy voters want three core mandates to govern proxy advisory firm analyses:

  • Protection of shareholder voting rights
  • Ensuring that executive compensation is appropriately linked to company performance
  • Close scrutiny of board structure and diversity

However, it is important to keep these advisors’ recommendations in perspective. Ultimately, investors believe proxy advisors’ recommendations provide useful guidelines, but not mandates by which they must abide.

Regardless of commentary and recommendations from rating agencies, there is still no substitute for focused and meaningful engagement with your investors on your specific issues as they pertain to your board, management, strategy and performance.

The Executive Summary of this report will be released soon. Please contact David Bobker if you would like to review the summary report and discuss the full results.

CEO/Chair Structure & Company Performance

The Corporate Governance Intelligence Council recently partnered with Simpson, Thacher & Bartlett to look at the correlation of CEO/Chair structure and company performance.

There has been commentary on this topic in recent years indicating that companies with a separate CEO and Chair have outperformed peers with combined roles. Although there may be other motivations and rationale for separating the roles in the eyes of investors, this research shows that stock price performance is not impacted by corporate governance structure. There is, therefore, no economic proof that would indicate that a public company should adopt any particular CEO/Chair structure.

CEO/Chair Structure and Company Performance (PDF download)

 

Bank of England Weighs In on Climate Risks to UK Banks

The conversation around climate change continues to evolve with an increasingly broad pool of investors taking interest in CSR and the role it plays in corporate performance and valuation. In the latest move, the Bank of England, the central bank of the United Kingdom, has outlined what it sees as the risks facing the country’s banking system from climate change. Once considered to be primarily an issue for mining companies, oil & gas producers and heavy industry, climate change is now firmly in focus at banks, insurance companies and other financial institutions.

The BoE’s move is a significant shift from the traditional view of climate risk and corporate social responsibility. Historically, the role of regulating environmental and social risk disclosures has fallen firmly in the remit of government, but the BoE’s Quarterly Bulletin reflects a change in the market that has seen financial regulators, non-government agencies and major institutional investors taking on a more aggressive stance toward risk assessment and disclosures.

The Bank groups climate-related risk into two broad categories: the more obvious physical risks posed by climate and weather-related events, and the more esoteric risks posed by evolving business practices and market risk to the institutions themselves/their portfolio companies as they move toward a low-carbon operating environment. These risks can be significant but are not easily calculable, hence the BoE’s call for more enhanced discussion and disclosure.

In another important step, the BoE gave some support to the December 2016 reporting framework put forward by the Task Force on Climate-related Financial Disclosures. The framework analysis encompasses four broad areas of a public company’s climate-related disclosures, one of which includes the governance of risks and opportunities to the financial and investment operations of the company.

This recent move is just further evidence of the rapidly evolving climate change and CSR reporting landscape, as well as the pressure faced by public companies in effectively analyzing and communicating their activities.