Monday, April 05, 2010

UK Finance Minister Calls for Aligning Executive Compensation with Long-Term Company Goals

Calling executive compensation the "zeitgeist" of the global financial crisis and one of the iconic failures of corporate governance, UK Finance Minister Lord Myners said that executive compensation regimes that encouraged risk talking at the expense of long-term corporate goals were both a symptom and a contributor to the financial crisis. While conceding that government intervention in market mechanisms that determine pay can only go so far, the Minister told the ICGN seminar that it is imperative that executive remuneration regimes align executive and employee rewards with risk and contribution in order to encourage behavior consistent with the long-term health of the company and the best interests of owners. This should be at the heart of a firm’s corporate values, Lord Myners emphasized.

The Minister noted that the FSA remuneration code, which includes principles and guidance on sound remuneration practices, is in place and firms have been receptive to the idea that their compensation policies need to be structured over the long-term and not focus on short-term payouts.

Lord Myners noted that he personally wrote to Chief Investment Officers at leading fund management firms to ascertain what actions they have taken to promote the interests of their clients, in the matter of pay and incentives principles. He said that their responses will be available on the HM Treasury website.

In earlier
remarks at the National Assoc. of Pension Funds corporate governance seminar, Lord Myners said that one explanation for poor governance around executive compensation is the absence of an effective voice of ownership as a consequence of multiple changes that have weakened the relationship between shareholders and companies, including the internationalization of ownership and increased investment portfolio diversification, leading to a diminishing interest in company specific governance. While acknowledging that remuneration requires delicate judgment, he said that shareholders have a duty to ensure that judgments are well made and that outcomes are fair and reasonable and in the best long-term interests of the corporation.

It is also possible, he continued, that the professionalization of the non-executive component of the board of directors, through the increasing appointment of candidates who are either currently, or recently have been, executives of other public companies, has reduced challenge around compensation; and increased the tendency to look at matters from a limited perspective, rather than from the broader lens that would come from directors from more diverse and less well rewarded backgrounds.

The Minister has consistently called on both directors and shareholders to foster effective corporate governance and end what he views as a bonus culture that encourages short-term risk. In remarks at a global finance forum, Lord Myners said that it is also crucial to financial reform that policy makers ensure that remuneration is structured so that it rewards long-term value creation in an environment of rigorous risk control and regulatory compliance.

According to Lord Myners, it is critical that corporate directors make decisions based on long-term performance considerations; and that investment managers engage with the companies in which they invest and hold them to account when they fail to think long-term. In his view, the prevailing bonus culture failed to take a long-term approach to risk allocation and capital protection.


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