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Proposed Reforms to Directors’ Remuneration

Monday, 6 May 2013

Proposals are afoot for changes to the way directors of certain companies are remunerated. The proposed reforms to directors’ remuneration are mainly applicable to quoted companies registered in the UK and are likely to take effect on 1 October 2013.

These reforms, which may yet be subject to amendment, have arisen against the backdrop of company failures and excessive remuneration of company executives in spite of poor stewardship.

Going forward, shareholders will be empowered to have binding votes on the remuneration of company executives in order to make them more accountable to the company and provide a nexus between performance and pay.

Remuneration Report: Remuneration Policy and Implementation Reports

The reforms amend the parameters of the remuneration report to require:

· A statement from the chairman of the remuneration committee

· The company’s policy on remuneration

· A report on how the remuneration policy is to be implemented

However, the most important change is that shareholders will now have binding votes on the resolution to approve directors’ remuneration every three years. Any proposed remuneration policy amendments before the end of each three year period will need to be voted on at a general meeting.

Remuneration Policy

According to the reforms, the remuneration policy must stipulate how the company intends to pay its directors and how they arrived at that pay. The company must show how it intends to support the pay in view of its long term plans and performance.

Details of pay for exit, recruitment and loss of office must also be contained in the policy.

Implementation Report

Once a remuneration policy has been approved, an annual implementation policy must be prepared. This will be based on the implementation report from the previous year and will enable shareholders to make an annual comparative analysis of directors’ pay between companies in the same sector.

In respect of the implementation policy, shareholders will have non-binding advisory votes which mean that in the event of no resolution passed on the implementation policy in a particular year, the remuneration policy must be presented for approval the following year.

Shareholder Activity

Shareholders will be able to play more active roles in curbing excessive pay and preventing corporate governance failures.

When a director leaves office, exit pay received and future payments to be earned must be published by the company as soon as practicable to show that the pay is justified. It aims to curb the practice of postponing earnings to a future date to avoid scrutiny while in office.

Where shareholders do not approve the remuneration policy, the existing policy may be used or elements of the new one that are not consistent with the policy may be presented for a separate approval. A third option is to call a general meeting and present an amended policy for approval.

Any action to recover unauthorised payments may be brought by the directors on behalf of the company and, where they refuse; the shareholders may obtain permission from court and bring an action through derivative rights under section 260 of the Companies Act.

If you would like more information about how these changes might affect you as a director or a shareholder, Rollingsons has experienced lawyers who can assist you. For more information please contact James Crichton via e-mail or by telephone on 0207 611 4848.