Research
Remuneration and independence in the EU
Many EU Member States have not recommended that shareholders
vote on board remuneration, a
European Commission report has revealed. Furthermore, a parallel report
on director independence has called for proper “cooling off” periods before
a chief executive steps up to a company’s chairmanship.
The reports examine application of EU recommendations on director pay and
independence. The report on the EU’s remuneration recommendation found that
although shareholders usually have a voice in the determination of
remuneration criteria for supervisory boards, few Member States have
encouraged companies to involve investors in decisions on executive
remuneration, even on an advisory basis. Only about a third of Member States
have such a recommendation in place: France, Ireland, Hungary, Lithuania,
Malta, the Netherlands, Sweden and the UK.
However, on the whole application of the recommended transparency
requirements on remuneration is relatively high: a large majority of Member
States have introduced high disclosure standards for the remuneration of
individual executives, and a significant number have made such disclosure
compulsory, thereby going beyond the recommendation’s standards.
Internal market commissioner
Charlie McCreevy spelt out the importance of transparency in this area:
“Directors’ remuneration matters greatly to a company. The level of
managers’ pay may have a significant impact on whether the company can
recruit and retain directors having the qualities required to run the
company efficiently. However, remuneration is also an area of potential
conflict of interest with shareholders, and therefore they could expect a
greater say on this matter. Only a few Member States have recommended this.
I invite the others to call for a greater involvement of shareholders in
setting remuneration criteria”.
The Commission’s report argues a higher level of transparency is likely to
stimulate more active shareholder participation in company affairs.
Furthermore, remuneration was a prominent feature in many of the corporate
fraud scandals that broke at the turn of the century, and it was suggested
transparency may also play a part in improving the standing of business and
reinforcing investor trust in corporate leaders.
The report on independent non-executive directors found a “clear trend
towards improving corporate governance standards in the EU”. Although reform
remains ongoing in some Member States, regulatory overhauls have resulted in
reinforced safeguards along the lines of the recommendation, with a “comply
or explain” principle for corporate governance codes widely applied as the
cornerstone of compliance. All Member States now require or recommend the
boardroom presence of independent directors.
However, in addition to the “cooling off” issue, weaknesses were found in Member States’ promotion of the presence of independent non-executive directors where there are potential conflicts of interest between management and shareholders. The report called it “alarming” that not all Member States recommend a strong independent presence on remuneration or audit committees: this, the report argued, means managers may still be able to significantly influence their own remuneration, and the costs for the company and the risk of abuse may remain high.
The Commission is now carrying out further evaluations — monitoring Member
State implementation of the recommendations — to help assess whether the
recommendations are bringing about their expected results, and whether any
additional EU-level measures are needed in these fields.
August 2007