Friday, 21 January 2011

Rem comm reform

PIRC calls for a ‘nudge’ to remuneration committees

The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.

In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy.

Alan MacDougall, PIRC’s managing director, said: “Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.”

PIRC also calls for the Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote.

“There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.” said MacDougall.

To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.

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