Say-On-Pay Fever Spreads To Europe

European listed companies may be forced to give shareholders the final say on executive pay, pending the outcome of a public consultation by the European Commission (EC).

The recent move by the EC, the executive body of the European Union (EU), is part of a suite of possible reforms it unveiled on April 5, which examine ways of improving the corporate governance of listed companies in the 27 member states.

The prospect of Europe-wide legislation on shareholder say on pay comes in response to the slow uptake of existing non-binding guidelines issued to EU countries by the EC. ‘In a minority of member states there is a recommendation or legislative provision which promotes shareholder voting on remuneration policy,’ the EC revealed, in a progress report released last year.

The UK is one of the member states where shareholders have become accustomed to voting on executive pay, albeit in an advisory capacity. ‘For several years UK PLCs have had to have separate remuneration reports voted at AGMS, and several high-profile votes have occurred where reports have been rejected resulting in dialogue with institutions and companies and in some cases boards backing down on remuneration,’ says Robin Johnson, a corporate partner at international law firm Eversheds. ‘The new Corporate Governance Code last year put even more emphasis on remuneration principles and emphasised the need not to reward poor performance.’

Even so, the UK’s involvement of shareholders in the dialogue on remuneration may not be enough to satisfy Europe’s legislators. In an indication of current attitudes at European level, the EC warns in its consultation document: ‘[T]he mere fact that shareholders have a right to vote on remuneration policy does, in the commission’s view, not qualify as encouraging shareholder voting on remuneration policy.’ 

Any legislation from the EC will be based on the feedback from the public consultation, scheduled to last until July 2011. But the possibility of a formal veto on executive pay being given to shareholders is a cause for concern in the UK, where the highest earners are already perceived to be under attack following the imposition of a new 50 per cent income tax rate in 2010 on all earnings over £150,000 ($246,000). The return of bumper pay packets to the top executives at some of the UK’s bailed-out banks is also adding to public criticism of the UK’s highest-paid executives.

‘[I]ncreasingly, the global economy is attracting talent from far and wide and while it is important that EU rules should address public worries, it is vital that they do not create a hostile regulatory framework that could drive Europe’s best talent out of the continent,’ says Johnson.

Other potential changes being considered by the EC include the implementation of female quotas for European boards and the imposition of a cap on the number of directorships that a non-executive can hold at any one time.