COMPANY LAW

Company Law



Company Law

Introduction

Stephen Hester, the boss of Royal Bank of Scotland had stopped the provision of bonus amount among the employees, because the amount touches the high figure of £1m. However, after intense public pressure Mr Hester had to release the amount. The reason for the release of the amount was not limited to the pressure from the public, but the Commons vote triggered by Labour also force his action. This paper, in connection to the above mentioned scenario, will critically evaluate the full extent to which shareholders are legally empowered to challenge excessive remuneration paid to the company's directors and will also comment on the reasons for the apparent reluctance of institutional investors ever to challenge (what is in the eyes of the public) the excessive remuneration paid to CEOs. The paper will also comment on why government being the major shareholder that is about 82% did not interfere in Hester's decision.

Discussion and Analysis

The last time any major changes were made to the way that shareholders oversee executive pay was in 2002. From this point onwards listed companies were required to publish a separate directors' remuneration report in the annual report and accounts. In addition, shareholders were for the first time given the right to vote on these reports on an advisory (i.e. non-binding) basis (Keay, 2010). The introduction of the advisory vote meant that if shareholders opposed the remuneration report it became difficult for the board of directors to proceed without further consultation with shareholders. The objective of the 2002 reforms was to encourage shareholders to be more engaged in corporate governance issues in the companies they owned. In some notable cases the reforms were successful, with shareholders opposing proposed payouts to such an extent that the companies proposing them had to return to shareholders with amended remuneration reports3. However, the level of dissent against remuneration reports was never above 6% on average in the period 2002 to 2008. In the wake of the financial crisis - in which corporate governance failures were arguably a significant contributing factor - investors began asking “where were the shareholders?” (Model business corporation act, 2011) With shareholders still licking their wounds, the focus has returned once again to the issue of executive pay - the preamble to the UK Government's response to the BIS consultation points to the reason why (Keay, 2010):

Median total remuneration of FTSE100 CEOs rose from an average of £1m to £4.2m for the period 2008-10. This is more than a fourfold increase; significantly greater than the increase in the FTSE100 index, retail prices or average pay over the same period (Goddard, 2012).

The question now being asked is: if returns to shareholders have been so poor in recent years, why are we still seeing large payouts to company executives, in particular in the banking sector? However, this is not the only issue. Active, engaged investors have for many years been trying to address what they see as “rewards for failure” ...