PIRC, the UK based Pension & Investment Research Consultants, has now released the 2014 edition of its UK Shareholder Voting Guidelines. The name of the document gives away a little of PIRC’s intentions, with the Guidelines now looking to protect high standards of financial governance and support shareholder rights, rather than promote high standards of business and wealth creation. So, what’s changed since 2013?
Unsurprisingly, executive remuneration and its disclosure is the area that has undergone the most extensive rewrite. We were already aware of some of PIRC’s positions (such as the opposition to all new LTIPs), some sound very familiar (e.g. adopting a mandatory holding period after share awards vest) and some are entirely new, reflecting PIRC’s views on the new DRR Regulations. The 58 pages contain several thoughts, including:
- Redefining quorate – PIRC expects Remuneration Committee terms and conditions to state that the Committee is not quorate if both:
- advisers are present; and
- there are no members present with a sufficient understanding of the technical issues being discussed (which might be why the advisers are around to advise!).
PIRC uses the recent Court of Appeal decision concerning Eversheds LLP to highlight its concerns about the role of remuneration consultants and potential conflicts of interest. PIRC evidences its concern of consultancy advice failing to meet best practice by citing the instances that Remuneration Committee members have been unable to adequately explain a remuneration scheme.
- Executive “influence” – PIRC touches on the presence of executives (typically the CEO) at Remuneration Committee meetings, and states that such presence alongside remuneration consultants runs contrary to the legal position that the consultant has a duty to provide separate advice to the Committee.
- Ok, but you need to explain why – The Guidelines also talk about the impact of the new regime and PIRC’s expectations of the different aspects of the policy and implementation report. For example, the Regulations require a company to state if it has consulted with employees when setting executive pay, with most if not all companies confirming no such consultation takes place. PIRC expects those companies to explain why there hasn’t been a consultation.
- Relative size matters – PIRC is looking for companies to disclose a ratio of CEO pay to average employee pay in order to demonstrate that the Remuneration Committee understands the background to the new pay regulations (despite the fact that this proposal was specifically removed during the consultation process on the new Regulations). Indeed, PIRC’s methodology for rating remuneration policies will give credit to companies with a fixed paid CEO/average employee ratio of 20:1 or less.
- There’s no such thing as a grandfathered stock award – PIRC expects companies to include every stock award that remains outstanding in their remuneration policy. Actually, that’s what the rules already say, it’s just that the grandfathering provisions permit companies to meet those prior obligations even if they are not included in the policy.
- Looking for jiggery-pokery – PIRC also wants to see extra data in respect of award grants. For example, details should be included on options that will allow shareholders to work out if the date of grant coincided with historically low market share prices.
- Evenly matched pay and performance – PIRC’s remuneration rating will give credit to companies where the percentage change in total realised pay for the CEO over the last five years is aligned with the percentage change in TSR over the same period.
- Don’t spend it, you may need to pay it back – PIRC considers that clawback (i.e. the recovery of sums already paid) is preferable to malus (i.e. the withholding of sums yet to be paid). Many companies will have implemented malus provisions to date but may not be able to clawback awards which have been paid. Clawback is an area that is riddled with pitfalls, not least the possible tax implications, so care must be taken if this recommendation is to be acted on.
- Ascertaining the unascertainable – PIRC expects full disclosure of the maximum amounts that could be payable on termination, whether or not they are for loss of office and regardless of whether they are included in the formal service contract. This is no doubt looking to deal with share scheme interests (and other arrangements) which will vest on termination.
- Heads we win, tails you lose – PIRC may consider the use of discretion that is to the benefit of directors and scheme participants as evidence that the scheme design was itself deficient as it did not generate the performance it was intended to incentivise (yet the reverse is perfectly acceptable!).