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Executive pay: further call for change in paper released by Chris Philp, MP

The issue of executive pay has increasingly been the subject of press coverage in 2016, particularly since the speech made by Theresa May before becoming Prime Minister and leader of the Conservative party in which she outlined her proposals to make changes to corporate governance, including executive pay.

Restoring Responsible Ownership, a paper authored by the Conservative MP and Treasury Select Committee member, Chris Philp, released on 1 September also examines and recommends proposals on corporate pay. In the paper, Philp argues that highly fragmented shareholdings in listed companies and a focus commonly on the short term by fund managers has often resulted in a failure by shareholders to exercise proper oversight of the companies they own. Consequently, an absence of sufficient shareholder control and oversight can, in turn, create circumstances in which executive pay is allowed to escalate. Effectively, Philp argues for greater engagement by long-term shareholders to curb excessive pay.

Broadly, the paper proposes:

  • Mandatory publication of pay ratios of CEO total single-figure remuneration to median employee total pay.
  • An annual binding shareholder vote on the remuneration report.
  • A mandatory shareholder committee comprising the largest five shareholders who have held shares for more than 12 months. The chairperson of the main board and an elected employee representative may attend and speak but not vote at shareholder committee meetings.

The paper proposes that the shareholder committee should:

  • Replace the nomination committee and be empowered to recommend director appointments and removals for a vote at the AGM.
  • Approve the pay policy and pay packages proposed by the remuneration committee prior to being put to the shareholder vote at the AGM.
  • Pose questions requiring a response by the main board including on corporate strategy and corporate performance.

The proposals in the paper, some of which resonate directly with those advanced by Theresa May, are likely to contribute to the debate on executive pay at a time when the Prime Minister has recently reiterated her commitment to addressing the issue. At a press conference at the G20 summit on 5 September, she stated that the government would bring forward a consultation this autumn on measures to tackle corporate irresponsibility including dealing with excessive corporate pay and poor corporate governance and having employee and customer representatives on boards.

Therefore, it seems that, notwithstanding the enormous task of Brexit and resources likely deployed on it, government proposals on executive pay may be anticipated in the near term.

Practical Law Caroline Pearce

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