A revised Joint Statement on Executive Contracts and Severance has been issued by the Association of British Insurers ("ABI") and National Association of Pension Funds ("NAPF"). The new version is much shorter than its 2003 predecessor, but the key concepts remain largely unchanged. The main thrust remains to encourage listed company boards and remuneration committees to design and negotiate appropriate executive contracts which avoid departing executives being rewarded for under-performance. The Joint Statement should be read alongside the ABI Guidelines on Executive Remuneration updated in December 2007. The ABI's press release is available here.
Notable changes from the 2003 version include:
- Boards are now strongly encouraged to consider notice periods of less than one year – previously the statement noted that shareholders preferred periods of less than a year, that such shorter periods would be appropriate if a one year period would lead to an excessive severance entitlement, and that boards should be able to justify the period chosen. This element is highlighted in the ABI's press release.
- There is a new emphasis on disclosure. The company website should set out key elements of directors' contracts and the Remuneration Report should include a summary of those key elements, the constituent parts of any severance payments, and a justification of the total level and elements of severance paid. As in the previous version, the Remuneration Report should also include a statement on the contract policy (including terminations and the approach to mitigation) and the corporate objectives set for executives. However, there is a new comment that shareholders will take account of this issue when voting on the re-election of members of the remuneration committee (as well as when voting on the Remuneration Report).
- Remuneration committees are expected to review contracts periodically and consider whether they are in line with their policy and the ABI Statement. The inference is presumably that they should consider seeking to negotiate changes to contracts which are no longer in line.
- There is a stronger statement against change of control entitlements and against liquidated damages provisions without any set-off for mitigation. The 2003 statement envisaged that provisions entitling executives to additional protection in the form of compensation for severance as a result of a change of control might be acceptable in highly exceptional circumstances (such as the recruitment of a new chief executive of a troubled company); the new statement simply repeats what is in the ABI Guidelines, namely that there should not be additional compensation for severance as a result of a change of control. Likewise, the 2003 statement noted that shareholders did not consider liquidated damages clauses to be generally desirable and, if used, should be subject to arbitration on the amount payable; the new version states that investors are not supportive of such clauses. Phased payment provisions remain in favour.