Large and Medium-sized Companies and Groups Regulations 2013 - A Step in the Right Direction?

So, it’s time for our first law-related blog post and what better a place to start than a topic very dear to my heart? With an article due to be published in a 2014 edition of the European Business Law Review and numerous personal blog posts on a previous matter, coupled with the 2013 Regulations, the issue of directors’ remuneration seems like the perfect place to begin.

To start with a little context; it has become increasingly common for journal articles and all others forms of media to begin by referring to the most recent global recession and I shall pay respect to this recent trend. The recession heightened pre-existing tensions in relation to the salaries taken home by directors of public companies. The crude summary is that whilst thousands of jobs have been axed at the lower end of the pay scale (for example the thousands of redundancies within the commercial and retail arms of RBS) in a bid to “reduce costs and save money” the high-earning company directors of the same companies have seen their bonuses inflated to levels exceeding those previously seen.

Policy makers are not unfamiliar with this issue; the Greenbury Committee had recommended a need for greater transparency on such reports and the need for full disclosure of remuneration packages with the aim of allowing investors to make informed decisions about whether or not to invest in the company. The shareholder vote, however, remained advisory and the Board of Directors of a company could not be legally compelled to consider. Furthermore, the disclosure requirements led to increased competition as directors became increasingly aware of what their peers were pocketing on an annual basis.

The issue was considered again in 2012 by the Department for Business Innovation and Skills (BIS) and the proposals that followed suggested giving shareholders a binding vote on directors pay as opposed to the current advisory. In my upcoming publications I have highlighted the flaws with this, and there are many. Firstly, despite the shareholder spring, where shareholders were making use of their advisory vote, most shareholders are more interested in the profits of a company as opposed to its corporate governance structure. Secondly, many shareholders only hold shares on a short-term basis (“buy them cheap and sell them high”-type investors). Thirdly, shareholders are often detached from the running of the company and so will know very little about how the performance of the director has impacted upon the company (for example, a company could be making a loss but without the director it could have become insolvent), I could go on.

The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 will apply to companies from the beginning of the new financial year. The Regulations are indeed a step forward with regards to transparency with greater requirements on disclosing non-salary remuneration such as scheme benefits, pension benefits, and the said director’s shareholding. The reports will also need to contain a statement relating to how an agreed remuneration policy is to be implemented and the performance indicators with details of how awards will be calculated. The report must then be put to the shareholders for a vote but their opinion retains the status of an advisory vote.  

So what to make of it? The Regulations are a step forward but more importantly are they a step in the right direction? It is argued that this is not the case. Disclosure requirements have been seen through remuneration reports for a number of years, the truth is that the remuneration is dictated by the market and less by shareholders who tend to remain passive. This criticism is, however, qualified. It is notoriously difficult to formulate a corporate governance strategy that does not fuel and already raging fire. If you cut remuneration in a manner that is inconsistent with the global market or even other professions then company directors may walk. Time will tell whether the proposals, if approved by Parliament, have a substantive impact on the market.

Jay Gajjar


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