-INCREMENTAR LA HABITABILIDAD
3.3.1.3. OBJETIVOS PARTICULARES Y ESTRATEGIAS PARA ALCANZARLOS
3.3.3.2.2.1 Voting in general
This is the second and most important tool for shareholder control of their company. The voting system in listed companies has evolved from being “one person, one vote” to “one share, one vote”.229
Thus, when shareholders vote on a resolution at the Annual General Meeting (AGM), the rule of the majority will be applied, giving the shareholders who own the majority of shares control over the company. Moreover, shareholders are not obliged to vote or exercise their voting right in any particular way. As Lord Lowry has observed, “the shareholder may lock away his paid up shares and go to sleep”.230
For the institutional shareholders, the situation of voting might be different, as the issue can be said to form part
228 J Carpenter, T Cooley and I Walter, “Reforming Compensation and Corporate Governance” in: V Acharya, T
Cooley, M Richardson and I Walter (eds), Regulating Wall Street, (John Wiley & Sons, New Jersey 2011) 501.
229 A Rahmani, “Shareholder control and its nemesis” (2012) 23(1) International Company and Commercial
LawReview 12, 13&14.
88
of their accountability to their clients, which is not required in law but has become accepted in practice.231
The argument for mandatory voting is to oblige shareholders, particularly institutional shareholders, to monitor their investee company. They have previously been accused of being “absentee landlords who are happy to collect ‘rent’ in the form of dividends but who do not seek to monitor management with the result that sub-optimal managerial performance goes unchecked”.232
However some are against this, believing that the mandatory vote might become an exercise in “box ticking”. Therefore, the UK has chosen to make voting a requirement for institutional shareholders as part of its corporate governance under the approach of “comply or explain”, and now comes under principle six of the Stewardship Code. The Myners Report found that in 1999 the voting levels by institutional shareholders had risen to 50 per cent, compared with 20 per cent in 1990.233
There have been efforts to facilitate voting and increase its levels. The NAPF Report in 1999 identified some impediments to voting, the most notable being the problem of outdated paper-based voting systems, which led to the recommendation to facilitate an electronic voting system, which was introduced in 2003. Another issue was the communication problem between pension fund managers, fund managers, custodians, registrars, and companies. The Shareholder Voting Working Group issued a number of reports, stating in its fourth report in 2007 that the voting level had risen from 50 to 60 per cent.
3.3.3.2.2.2 Voting on the Remuneration Report
The Greenbury Report and the Hampel Report recommended that shareholder approval should be required for any long-term incentive plans; however, this can be seen as a clear encouragement of short-termism as boards may avoid designing long-term remuneration plans which reward long-term performance in order to avoid shareholder voting and focus on short-term incentive plans which might not be in shareholder interests. However, the reports failed to find a workable way for shareholders to vote on a remuneration report as a whole,
231 Roach, “CEOs, chairmen and fat-cats” (n 204) 301. 232 ibid 301.
233 Department of Trade and Industry, “Institutional Investment in the United Kingdom: A Review” (DTI,
89
and delegated this to the board to decide whether the board wished to have shareholder approval of the remuneration report. This was due to the belief that recommending the establishment of a remuneration committee comprising non-executive directors as the indirect voice of shareholders could have positive effects on remuneration practices, as well as allowingthe shareholders to put forward their own resolution if they were not happy with the remuneration report.
The most important development in this regard is the Directors’ Remuneration Report Regulations 2002, which require quoted companies to prepare an annual DRR and allow shareholders to vote on it as a whole, but not on each director’s remuneration. This requirement now comes under sections 439 and 439A of the Companies Act 2006.
However, when it was introduced in 2002, this vote was classed as mandatory but not binding. It was an advisory vote because remuneration matters are extremely complicated and even remuneration committees sometimes need to employ professional remuneration consultants.234 Thus, a company was not obliged to take any notice of the outcome, as “[n]o entitlement of a person to remuneration is made conditional on the resolution being passed by reason only of the provision made by this section.”235
The vote currently applies to the two main parts of the DRR; a binding vote on the future remuneration policy and an advisory vote on the implementation report. The binding vote must be taken at least once every three years unless the company wishes to change its policy.236 Once the remuneration policy has been approved, the company will only be allowed to make payment which conforms to the policy unless separate shareholder approval is obtained.237 The advisory vote will remain as it was for the implementation report.
234 Roach, “The Directors’ Remuneration Report Regulations 2002” (n 196) 145. 235 Companies Act 2006, section 439(5).
236 Enterprise and Regulatory Reform Act 2013, section 79. 237
90
3.3.3.2.2.3 Assessment of the Voting on the Remuneration Report
The introduction of the advisory vote in 2002 aimed to make executive pay arrangements subject to the direct approval of the shareholder vote.238 It was rejected by some institutional shareholders as they saw it as a way of sharing accountability and responsibility with directors for the pay level, which should be the responsibility of the board.239 Moreover, it has been argued that institutional shareholders receive abnormal returns as they have access to what is called “soft” information, which is unknown to the market, and, due to the importance of this knowledge, institutional shareholders will not take the risk of losing the advantage of having such information as a result of voting against a directors’ remuneration report.240
Although the advisory vote will not bring any change to a company’s remuneration report from the legal point of view, it may do so in practice. Davies and Hannigan believe that the vote is a good opportunity for shareholders to express their views on directors’ remuneration, which they would not be able to do without section 439.241 They state that companies which have faced a negative vote have reconsidered their remuneration report and entered into discussion with their shareholders, particularly institutional shareholders, to amend the remuneration report and obtain shareholder support and agreement.242 Carter and Zamora found evidence that shareholders usually vote against a remuneration report when the salary is high; the payment of bonuses is not then sensitive to performance and to greater potential dilution from stock-based pay. They also found evidence that a board responded to a negative vote by controlling a salary increase and the dilution of stock options, as well as strengthening the link between pay and performance.243
However, companies must now have a separate section on the report stating their policy on future remuneration and since shareholder representatives in the UK such as the ABI and
238
S Thompson, “Executive pay and corporate governance reform in the UK: what has been achieved?” in: RS Thomas and JG Hill (eds), Research Handbook on Executive Pay, (Edward Elgar, Cheltenham 2012) 67.
239 J Solomon, Corporate Governance and Accountability (3rd edn, Wiley, West Sussex 2010). 240 Roach, “The Directors’ Remuneration Report Regulations 2002” (n 196) 145.
241 Davies (n 7) 406; Hannigan (n 14) 128. 242 Davies (n 7) 406; Hannigan (n 14) 127.
243 ME Carter and V Zamora, “Shareholder Remuneration Votes and CEO Compensation design” (2007) MAS
91
NAPF are well organised and able to produce guidelines on executive remuneration, this will lead to general consensus on the policy. This binding vote on the future remuneration policy is believed to strengthen communication and engagement between companies and their shareholders over the long term.244 Furthermore, if a remuneration committee ignores shareholder views, the report will be voted against and the company will have to change its policy, as happened to GlaxoSmithKline in 2003.245 Therefore, remuneration committees are now spending more time with investors to explain their remuneration policies and their relationship with business strategies.246
A sensible company will do its best to satisfy its shareholders in relation to the remuneration report, as, even if a shareholder vote on the implementation report does not affect the remuneration report, shareholders can vote negatively on other issues, particularly if they have brought their own resolution in accordance with section 338 or on the re-election of directors. Finally, the FRC consulted on a requirement for companies to report to the market in circumstances where a company fails to obtain at least a substantial majority in support of a resolution on remuneration in addition to what is in the regulations. This is suggested to be in excess of 20 per cent voting against the report, following the guidance of the GC100 and Investor Working Group.247 This now forms part of the UK Corporate Governance Code:
When, in the opinion of the board, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result.248
However, a study published in 2010 found that the average level of dissent was very small, averaging between six and nine per cent of the votes cast since 2002.249 It remains to be seen if the binding vote on the remuneration policy will close doors to debate and discussion on remuneration payments. Companies will rely on the policy for payment and if institutional shareholders do not take care when casting their votes on the policy, even they find 244 BIS/12/888 (n 68) 13. 245 Judes (n 187) 12. 246 ibid. 247 FRC, Directors’ Remuneration (n 143).
248 UK Corporate Governance Code (n 42) principle E2.2 249
92
themselves caught out by an extremely complex pay policy that they may not be able evaluate accurately, as happened with credit rating agencies when evaluating complex financial instruments in the financial crisis.
3.4
Conclusion
This chapter focused on the regulation of remuneration in the UK from corporate law and corporate governance perspectives. It argued that courts are ill-equipped to deal with problems in this area, as the test for declaring remuneration and other self-dealing transactions is insufficiently stringent, and interested directors can be involved in the decision making. The chapter then analysed how the UK approaches the conflict of interest arising from remuneration contracts, identifying the tools which are generally advocated, namely independence, disclosure to the market and shareholders, and shareholder votes.
The reform of the regulations and codes regarding the establishment of remuneration stems from attempts to solve the agency problem between shareholders and executives by trying to control remuneration practices by imposing extensive disclosure requirements to facilitate shareholder say in the outcome. It is also directed at aligning diverse interests through the greater use of performance-based remuneration. The reform has been heavily influenced by managerial power theory, reflected in attempts to reduce and eliminate executive power over terms of remuneration. This entails reducing their power over the board by splitting the role of CEO and chairperson, reducing guaranteed tenure and delegating remuneration decision making to an independent committee who are given support and guidance to assist them to reach fair and competitive decisions in relation to remuneration policy. As specified in the regulations, remuneration committees must also prepare a detailed remuneration report and present this to shareholders who make their opinions known via binding or advisory votes.
93