Tuesday, January 17, 2012

UK Legislation Would Provide Mandatory Vote on Executive Compensation and Otherwise Unlock Shareholder Power

The UK government is readying a legislative package that would increase the transparency of financial statements and give shareholders a mandatory vote on executive compensation. The legislation will introduce binding shareholder votes on executive pay as part of a package of measures to moderate boardroom behavior and will overhaul the way shareholders can access information.

In recent remarks, Deputy Prime Minister Nick Clegg said that the legislation is designed to give company shareholders the proper tools to behave like owners of the business rather than absentee landlords. The government does not want unhappy shareholders to sell their shares and move on, but rather to stay and throw their weight around so that the company improves.

One reason investors are passive, reasoned the official, is because they cannot see the reasons to act. Shareholders should be able to use annual reports as a kind of report card so they can see how well their money is being spent. But, he noted, many annual reports are impenetrable texts that obscure the financial statements rather than illuminate them.

Hundreds and hundreds of pages of facts, figures, charts and graphs are provided, but nowhere is there a clear single figure showing who gets paid what or a simple summary of where the money goes, such as how much is spent on directors, how much on dividends, or how mush is re-invested in the business. This type of information is absolutely essential for any investor trying to calculate value for money, posited the Minister, and not enough companies make it transparent.

The legislation will require companies to present financial information so that investors don’t need an accountancy degree to decipher them, he noted. For example, shareholders would only need to look at one number, not a dozen, to see how senior executives are being compensated. Companies must implement a clear policy for departing CEOs so that, if they deviate from that policy, and if a hefty payment is made for failure, that decision is illuminated. Also, the way the money is spent will need to be crystal clear. So if a company is spending too much on boardroom pay compared to the amount being reinvested in the business, noted the official, they will have to explain why and show investors where their money is going.