Remuneration Committee "Cronysism" - digging deeper

 

Since we published data on the number of executive directors in the FTSE 100 sitting on remuneration committees of other FTSE 100 companies, a common question we received was … what if you look beyond the FTSE 100? So we have re-run the numbers, looking at the FTSE All-Share (i.e. FTSE 100, FTSE 250 and FTSE Small Cap) and looked at the very latest data available (rather than the 30 Jun 2011 date used in the previous set).

The data shows little evidence of a significant problem (3% of FTSE All Share remuneration committee members comprising current CEOs), but that is probably not surprising given the demanding nature of CEO roles in particular which often leave little time for outside interests.

Current Executive Directors of FTSE All-Share Constituents

Across the FTSE All-Share, there are 98 remuneration committee posts filled by currently serving executive directors of other FTSE All-Share constituents. These 98 positions held by current executive directors are filled by a mixture of CEOs (54), Finance Directors (28) and other executive director positions (16). 

Of these 98 committee posts, only 15 act as committee chairmen – 4 in the FTSE 100, 8 in the FTSE 250 and 3 in the FTSE SmallCap.

In total, there are 1,323 FTSE All-Share executive directors, so in total 7.4% of them sit on a remuneration committee of other All-Share companies, with 1.13% acting as chairman of those committees.

Of the 1,323 executive directors, 416  serve as CEO. In total 54 remuneration committee positions are held by current CEO’s, of which 11 are as committee chair.

In our data set, there are 1,799 FTSE All-Share remuneration committee positions (including 482 chairs), so in total 5.45% of these members are made up of current executive directors of other companies, with 3.1% of the committee chairs being current executive directors of other FTSE All-Share companies.

Index where Committee position held Committee Chair? Index where executive position held
    FTSE 100 FTSE 250 FTSE SmallCap Total
FTSE 100 Yes 4 0 0 4
No 16 8 1 25
FTSE 250 Yes 3 4 1 8
No 12 20 6 38
FTSE SmallCap Yes 0 3 0 3
No 3 11 6 20

TOTAL Remuneration Committee
Positions held by Executive Directors

Yes 7 7 1 15
No  31  39  13 83
Total 38 46 14 98

Other Data Sets

There may be three other categories of executives/former executives sitting on Remuneration Committees that are of interest:

  • Current executive directors of other listed companies (Globally, by Region)
  • Former executive directors of FTSE All-Share Constituents
  • Former executive directors of other listed companies (Globally, by Region)

 We would expect the former executive director roles to show substantially higher numbers of current remuneration committee roles. Also possibly of interest would be the influence of the remuneration practices of US companies on the UK market through the presence of US-based former executives now sitting on the remuneration committees of UK companies.

Should Executives Sit on Remuneration Committees?

There are two sides to this argument – the negative argument being based on a perception of “cronyism” – a suggestion that FTSE 100 CEOs effectively set each others pay. The statistics do not back this up, as we pointed out in our previous blog piece – this is predominantly due to the effectiveness of the existing UK Corporate Governance Code independence criteria which have virtually eliminated cross-directorships in the UK.

On the flip side, more junior executive directors at FTSE 100 companies are often encouraged by companies to take on a non-executive role at other companies to broaden their business experience ahead of possible future promotion. Given the smaller size of boards, especially at SmallCap companies, they will typically sit on the remuneration committees as these committees are comprised of all non-executives.

Therefore we suggest that any regulatory action contemplated be delicately framed so as not to deter experience building – a particularly important consideration if we are trying to build more diverse boards.

Suggestion for Regulatory Action

If there is a case for regulatory action rather than investor engagement, probably the most straightforward approach would be to insert a UK Corporate Governance Code provision that a currently listed company CEO should not serve as the chairman of a remuneration committee.

2 comments to Remuneration Committee “Cronysism” – digging deeper

  • David Brimacombe

    The headline linking cronyism to remuneration committees did not deliver what I was anticipating namely an expose of the role of remuneration consultants who to my mind are heavily implicated in devising many of the schemes which are now under critical review. The change required is for the name and fees of all remuneration consultants to be published in the annual report. Remuneration committees are heavily dependant on such consultants who therefore enjoy a disproportionate influence; too often they seem to be keen to impress the CEO rather than consider the interest of shareholders.

    • Thanks for your comment. We were seeking to address the various UK Government Ministers’ statements about board membership which were not based on up to date facts. Shareholders have done very well at enforcing board committee independence standards which is why there are hardly any interlocks to speak of.

      The names of the remuneration consultants are currently available. We would welcome clarity on all advisor fees from remuneration consultants to investment bankers. Scapegoating one group of advisors could, we be believe, lose sight of the total cost of advice to listed boards as clearly poor M&A advice is likely to be significanlty more damaging to a company’s prospects than a badly designed share plan. Could I also commend the Remuneration Consultant’s Code of Conduct to you: http://www.remunerationconsultantsgroup.com/assets/Docs/December%202011%20Code%20of%20Conduct.pdf It hasn’t received as much publicity as the Headhunters’ Code http://www.mwmconsulting.com/downloadables/HeadhuntersCode-200711.pdf#zoom=75 but we think is more detailed and outlines the duties that the RemCons owe to their clients and their conflicts of interest policies.

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