23 May 2013

EuropeanIssuers' position relating to shareholders' vote on executive remuneration "say on pay"

EuropeanIssuers published its position paper on the European Company Law and Corporate Governance Action Plan. The EC intends to propose in 2013 an initiative aimed at granting shareholders the right to vote on remuneration policy and/or the remuneration report.

EuropeanIssuers may support the introduction of a shareholders’ vote on executive remunerations, provided the proposed regime remains flexible to accommodate the diversity of national regimes and corporate law principles. Some Member States have already adopted diverging systems: binding vote, consultative vote, or a combination of a binding and a consultative vote, either annual or on a less frequent basis (every two or three years), either on a remuneration report describing detailed remuneration or on the basis of a remuneration policy report.

To this end, EuropeanIssuers´ members emphasise that the vote should be “ex ante”, non-binding (advisory) and limited to remuneration policy. Moreover, it should only take place in case of a change in the remuneration policy.

Remuneration Policy versus Remuneration Report

EuropeanIssuers is convinced it is crucial to remain the well-established principle of separation of powers within companies unaffected. The Board of Directors and the Supervisory Board respectively, should remain responsible for determining the remuneration of executive directors, based on proposals made by the remuneration committee. The reasons for that are:

• Remuneration is one of the aspects of the negotiations carried out with the executive director.
• The Board has a much broader overview of all the challenges and is in a better position to ensure a balance between the interests of all of the company’s stakeholders when it is called on to decide on remuneration matters.
• Issues relating to executive remuneration involve particularly technical aspects (some of which cannot be easily understood by the shareholders e.g. the calculation formulae for variable executive remuneration) that cannot be dealt with by the AGM.

Therefore, a vote should only be on the remuneration policy.

Advisory versus binding vote

There are various arguments behind EuropeanIssuers’ decision to support the advisory (non-binding) vote:

• The main purpose of ‘say on pay’ is not its binding nature but the message it delivers to the Board of Directors or the Supervisory Board on a proposed continuation or change of remuneration policy. One of the best examples of the impact of an advisory (non-binding) vote concerns German companies in the DAX 30 index. According to EuropeanIssuers´ knowledge between 2010 and 2012 there was only one negative vote on remuneration policy. Even though the vote was non-binding the following year the company’s remuneration policy received 96.04 per cent support and got recognition by shareholders for its remuneration report.
• Investors’ preferences: according to a survey conducted amongst 35 institutional investors representing USD$ 12.86 trillions of assets under management (equity/bonds) in 2012, 65.7 per cent of respondents preferred "Advisory vote" than "Binding vote".
• Problems would arise in the different legal systems with their special checks and balances if the vote were binding: e.g. the effects on contractual agreements with executive directors in case of a negative vote and problems that arise if the vote of the AGM is void, etc.
• Introduction of a ‘say on pay’ system will give more influence to proxy advisers as institutional shareholders rely frequently on proxy advisers’ recommendations that may follow a “one size fits all” approach, rather than adjusting to the specificities of companies and their sectors.

Therefore, EuropeanIssuers would only support an advisory (non-binding vote).

Ex-ante versus ex-post vote

This issue is interrelated with the debate around the vote on remuneration policy versus remuneration report, as the remuneration policy relates to the future while the remuneration report according to EU recommendations is retrospective. Nevertheless, EuropeanIssuers would like to draw attention to the timeline and the potential unintended consequences resulting from the dangerous introduction of the vote on both future remuneration policy and the retrospective remuneration report.

• It is important to note that companies’ shareholders change in time. Changing majorities and other potential influences can easily lead to a situation where there is a negative vote on the past remuneration report even though the vote on the policy has been positive and the policy has been correctly applied. This situation could have a serious effect on company stability and subsequently performance, and confuse the board and shareholders as well as the public.
• The ex-post vote can be very problematic in case of a negative vote. It is difficult to claim back the compensation already awarded. It could also harm the reputation of a company and discourage potential good candidates for executive positions.

Therefore, EuropeanIssuers believes that a vote on remuneration should only be ex ante.

Press release

Position paper

© EuropeanIssuers