OBJETIVOS, POLÍTICAS, ESTRA TEGIAS Y PROYECTOS DE

The Commission issued a Recommendation, in April 2009, to complement its two previous Recommendations of 2004 and 2005. The Recommendation of 2009 regarding the regime of remuneration for directors of listed companies focused on the structure of directors’ remuneration and the process of the design and operation of the remuneration policy for directors of listed companies.66 The Commission recognized that “remuneration structures have become increasingly complex, too focused on short-term achievements and in some cases led to excessive remuneration, which was not justified by performance”.67

Therefore, the Recommendation on the regime for the remuneration of directors of listed companies has focused on six main areas.

The Recommendation asserted the need for the structure of remuneration to promote long- term sustainability of the company with the variable elements being linked to predetermined and measurable performance criteria which should include non-financial criteria relevant to the long-term success of the company. The limit on fixed components of remuneration should be sufficient to allow companies to stop paying the variable component in underperforming year(s) when the performance criteria are not met and the variable component should be limited. To promote long-term performance, the Recommendation advised using deferral techniques for a major part of the variable component for three to five years in order to enable firms to take account of long-term implications and reduce the unpaid parts accordingly. Companies should also be able, through contractual agreements, to reclaim variable components of remuneration that were paid on the basis of data which proved to be manifestly misstated.

The Commission allowed termination payments on three conditions. The first is that they do not reward failure or are not to be paid if the termination is due to inadequate performance. Secondly, they must be used for the primary purpose of providing a safety net in the case of early termination of a contract and not when a director leaves on his or her own account. The third is that termination payments should be set at a pre-determined limit in terms of amount or duration, which, in general, should not be more than two years’ annual remuneration and

66 _ibid. 67

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should only be on the basis of the non-variable component of the annual remuneration. However, this does not preclude termination payments in situations of early termination of a contract due to changes in the strategy of the company or in merger and/or takeover situations.

Schemes which award shares, share options or any other rights to acquire shares or be remunerated on the basis of share price movements also feature in the Commission’s recommendation. The Commission believes that this kind of scheme should be linked to the performance and long-term value creation of the company and wants to impose a minimum period of three years for vesting and another three years for exercising after the vesting and award. This division between vesting and exercising along with the requirement to retain a number of shares until the end of a director’s mandate is a way of preventing directors from making short-term profits and employing market manipulation,68 which is similar to what Bebchuk and Fried called for in their book Pay without Performance.69 In addition, the Commission wants these schemes to be subjected to predetermined performance conditions and not simply linked and awarded based on share price movements.

The final point is that the remuneration of non-executive directors should not include shares in order to prevent conflicts of interest. However, it is possible that this prohibition of awarding shares to non-executive directors might detach them from the company they oversee. Thus, the way that executive directors are provided with incentives to align their interest with shareholders should also be used with non-executive directors. Remunerating non-executive directors with shares or share profits equivalent will make them think like shareholders and act effectively. The current practice of remunerating non-executive directors with a payment based on their time does not help to ensure that they make a valuable contribution in the interests of shareholders.

The 2009 Recommendation aims at improving the structure of remuneration in the three aforementioned areas, and at strengthening the 2004 and 2005 Recommendations with regard to disclosure, shareholders, and remuneration committees. The Commission felt it was necessary to ensure that the remuneration statement recommended in 2004 should be clear

68 _{Arora, “The 2007-09 banking crisis” (n 51).} 69

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and easy to understand, and should contain: an explanation of how the chosen performance criteria contribute to the long-term interests of the company and which methods have been applied to determine whether those criteria have been fulfilled; sufficient information on deferment periods which are applied to the variable components of the remuneration; information on the policy regarding termination payments; information on vesting periods and retention periods after vesting for share-based remuneration; and information on the composition of peer groups by whom the remuneration has been examined.

The Recommendation also went on to strengthen the role of shareholders by reinforcing the remuneration statement and urging that it should appear clear and easy to understand. It also asserted that shareholders, and in particular institutional shareholders, should attend general meetings where appropriate and should make considered use of their votes regarding directors’ remuneration.

The Commission wants evidence that at least one member of the remuneration committee has knowledge of and experience in the field of remuneration policy, and also that members are exercising independent judgement and integrity. When using the services of a consultant, the remuneration committee should ensure that this individual does not also advise the human resources department or executive or managing directors of the company involved. The committee’s role should include: reviewing the remuneration policy for executive or managing directors, including the policy regarding share-based remuneration and its implementation; reporting on the exercise of its functions to the shareholders; being present at the AGM for this purpose, and ensuring that the remuneration of various individual directors was proportionate.